If you read this blog with some regularity, you probably know that Mondays are reserved for a macro-market technical view, while later in the week is reserved for sector or stock analysis. For this week’s macro view, I’d like to present a few reasons why I feel the market may be ready for an oversold rally. Interestingly, I wrote this blog on Friday for posting today, and I woke up to higher futures on the S&P today. I was also on BNN on Friday covering a few of these reasons, but the full list is presented below:
- Technical support. Technical support for the TSX lies right around current levels for the TSX (about 11,800), and just below current levels for the S&P 500 (1300 or so). I’ve marked support on the TSX and S&P 500 charts.
- Momentum oversold. 14 day RSI is oversold for the S&P 500, the TSX 300 and the NAZ – all of which saw sub-30 levels of this indicator last week. Further, the percentage of stocks trading above their 50 day MA’s has fallen to 20%. Anywhere at or under 20% can be considered oversold.
- Sentiment oversold. Rydex funds, which sells leveraged bull and bear mutual funds in the US, tracks its ratio of bull vs. bear fund assets. A “normal” market tends to show about 3.5 times the assets in their bull funds vs. their bear funds. In September, that ratio hit 4.5 times bull/bear, which can be considered overbought (investors were “too” bullish). Currently the ratio stands at about 1.5 bull/bear funds. The closer to 1:1 bull/bears, the more likely investors are becoming “too” bearish–a contrarian buy signal.
- 200 day MA break. As mentioned in last weeks blog work done by www.sentimentrader.com shows us that the break of the 200 day MA by the S&P 500, after a multi-year high such as we had in September, is actually a bullish sign–as opposed to the popular view of a bearish indication for future market direction.
- Fiscal cliff. Again, as mentioned in last weeks blog, any event of known consequences is likely to become a non-event. Like Y2K fears and so many others, the so-called fiscal cliff is likely to become just another forgotten moment in the markets long history of over reaction.
Please be sure to share your thoughts regarding this or other posts. I read all comments that are posted, and try to respond to them as well if requested! Also, I’m always interested in hearing about sectors or charts that interest you for inspiration of future topics.