The degree of oversold US stock market increases. The share of stocks in the S&P-500 index, trading above the 50-day average, is one of the lowest in all time.
Now about the technical argument that increases the likelihood of a quick reversal (final or corrective — no one will say that in advance). The graph above shows the weekly chart of the S & P-500 index from 1999 versus the share of index papers that are trading above their 50-day averages.
At the close of the week on Friday, the value of this indicator was 6.2% (that is, 31 out of 500 stocks in the index are trading above the 50-day average). As you can see, over the past 20 years, this is the 4th value from below. The share was lower in 2002, 2008 and 2011. Moreover, it was only in 2008 that the fall in the market did not stop at this, and finally at least the index happened only after 5 months (the index fell by another 20% during this time).
Of course, on the basis of such a small sample it is impossible to draw valid conclusions and build a strategy. By itself, the low value of the indicator can not be a signal for immediate purchase. It’s not about that. But the fact is that such a situation can still help in making a decision. How?
For speculators who are trying to engage in timing, you need to ensure that after such an extremely low value the indicator can quickly show a return to values above 70-80%. This would be a reflection of the fact that at first the index papers tried to go below the 50-day averages (thus, unfolding their medium-term trends), but then suddenly came back abruptly and again above the average. If we see such a drastic change in the “regime” (a quick return from extreme oversold to overbought), this could be the beginning of a new medium-term growth cycle.
For investors, the interpretation is somewhat different. Investors who are trying to make the right balanced portfolios are often concerned about when to start building a portfolio. That is, even realizing that on the long-term horizons, not timing is important, but the composition of the portfolio and its rebalancing, such investors, all the same, try to guess the best moment (that is, in fact, do the same timing). They can be pleased by the fact that extremely low indicator values occur close to pivot points in terms of time. I repeat: time, but not the price level, which in the end may be much lower.
In general, as an observation (not a recommendation!), We can say that while the index is in the long-term uptrend since 2009 (red line), any extreme oversold has more chances to be realized. But how to use it is a matter of subjective preferences and risk appetite. You can act on the principle of «buy and pray,» hoping to successfully catch the falling knife. And you can safely observe some time aside and begin to act only when long-term oversold will be supported by short-term confirmation of a reversal. There will be signs of confirmation of a reversal, we will definitely consider them here.