U.S. Markets: Just How Oversold Are We?

 

Once in a while you get shown the light

in the strangest of places if you look at it right.

-Jerry Garcia

I mentioned for the market to rally, we needed some sort of catalyst. But who would have thought that the catalyst would come from GM. GM! Go figure. They announced that their sales were better than expected, and the stock rallied 10% and jumpstarted the market.

That led to a wave of short covering, and the major indexes rallied and all finished in positive territory. Volume rose on the day, making for a solid reversal. Now all we need is some solid follow-through for the oversold rally to continue.

So how oversold are we? Here are some anecdotal datapoints:

• The advance/decline line has been negative in 10 of the last 11 sessions.
• The S&P oscillator hit -9.4, the most oversold reading since July 2002, which was a major low in the market (even as it was undercut in October 2002).
• Jeff Saut tracks what he calls "selling stampedes," and said that this stampede has gone on for 30 days, which is an extremely rare occurrence.
• The % of stocks on the NYSE trading above their 50-day averages is back at levels seen at the March '08 lows (see graph below).

 

In addition, the chart below is a volume-based oscillator that Helene Meisler at TheStreet.com publishes daily. You can see that now, it is more oversold than it had been at the Nov. '07 lows, as well as at both the January and March '08 lows.

 

Therefore, the conditions are setup for a nice oversold rally. To my critics, I never said I would be able to perfectly call the exact day the market would bottom. What I did say was that I wanted to use further upcoming weakness to add long exposure to the market, since historically these oversold readings have proven to be good trading opportunities.

Comments

[adan]

good info, thanks!

[dougnhi]

more buy the dip mentality. At some point in the bear market, this mentality will fail completely, and folks who subscribe to it will be burned beyond recognition. Best advice for folks who can't afford to lose more money is to expect downside surprises and avoid this article's advice strategy completely. The reward potential is dwarfed by the risk and downside potential. Note that today's future's market rise vanished in an instant on a bad employment report. This is the expected behavior in bears....all rally attempts will fail and the downside trend will remain intact. Wait for capitulation before jumping in on the long side. Buyer's beware!

[User 16423]

I also believe the market is oversold and now could be an excellent time to buy. If you continue to be pessimistic, just buy but put in stop loss orders like you should anyway and then you would still participate if the market does indeed rise and your losses will be minimized if it falls. Sounds like common sense to me.

[JimHawthorne]

I well remember a stock that was drastically oversold and the talking heads were all saying it could go nowhere but up. That was in the Fall of 2001.
It was called Global Crossing (then GX)...

[bluecat]

Yes, Cramer was trying to call a bottom several weeks ago using the S&P oscillator. Look where that got you. He also got everyone in Sociedad Quimica {SQM} right at its blowoff top! He said the oscillator worked every time in the past except 1987. Well, guess what!

[sb-tiger]

We are in a bear market- avoid bottom fishing and value traps.

Bottom will only be achieved after we stop looking for one. Meanwhile we may get bear market rallies, like the one we just had from March-May.

[basehitz]

Good piece. The pessimism is so dominant it's easy to lose objectivity. Along the same lines, Investors Intelligence this week had bears 44.7 to bulls 31.9. I've only seen it that pessimistic one other time since 2000. I also bought this week. But it's only a trade IMO.