Sunday, January 24, 2016

Historically Oversold?

After pulling back to levels (low 1,800's) last visited in April and October of 2014, the S&P 500 was able to stage a massive rally over the last 2.5 trading days of the week to finish above 1,900.  Even with the bounce, the index is still down nearly 7% so far in 2016 and appears to be under severe pressure as the combination of oil being crushed, recession fears, China's slowdown and doubts about the Fed's course of action have put investors on edge.

So it's clear from a "headline" point of view that the market is under a significant amount of stress and with that in mind we wanted to see how current conditions compare to some of the market's more recent challenging periods (1998, 2002, 2008 & 2011)

1998 and 2011 feel as if they are the most appropriate analogs so far as they were corrections within a secular bull market while 2000 and 2008 were within the context of a secular bear.  Nevertheless, they stand out as a few of the more significant pullbacks in the last 2 decades so here we go...

This week the % of stocks above their 200-day moving average reached extreme oversold levels with a reading of 11.48%.  Historically this low of a number has been a good long-term indicator of finding an eventual bottom.  Here's where this gauge bottomed out in the past years referenced and then when the market ultimately bottomed:

8/8/2011 - 11.48% - market didn't bottom until October 4th, 2011
10/9/2008 - 2.12% - market didn't bottom until March 6th, 2009
10/9/2002 - 15.99% - market bottomed one day later but close retest in march of 2003
9/4/1998 - 15.61% - bottomed October 8th, 1998

It's interesting that the 2011 low reading was exactly the same as Thursday's (11.48%).  And the 2002 and 2008 readings bottomed on the exact same day.

If, as we mentioned, this market is more similar to 2011 and 1998 it looks like this reliable longer term indicator may have bottomed.  However, we'll caution that momentum typically bottoms before price and what we'll often see is price requiring another re-test of the lows (creating positive divergence) before turning higher.

1998 (% of stocks above 200 day in red)





Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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