By Paul Price
Thursday might be the first three-day losing streak for the broad market in quite some time. Many stocks that you were hoping to buy a few weeks ago ‘if they ever pulled back’ have come down in price. Not surprisingly, many of the same traders that were praying for chances to get into stocks cheaper are now hesitant to do so. That’s the conundrum of investor pyschology. Higher prices instill confidence that shares are going up.
Declining quotes often make us question our investment thesis. Falling stars also make it hard to pull the trigger as waiting might result in even better entry points.
Two similar but non-identical indicators say you should be putting some cash to work right now. As of yesterday’s close, the S & P 500’s 10-day advance/decline line was near its best levels (when used as a contrary indicator) since the exact bear market low set on March 9, 2009.
I linked many of the most oversold time periods to their respective places on the chart of the S & P 500 ETF (SPY). Clearly, anyone with a reasonable time horizon would have been much better buying than selling once the cascades of panic had cleared shares held in weak hands. I expect the current sell-off will lead to the same result.
The Overbought/Oversold Oscillator flashed an almost identical signal on the close Wednesday. Today’s action sent it to even more extreme readings.
The chart showing the Overbought/Oversold Oscillator along with the S & P 500 (above) is visually cluttered and hard to read. I added the exact same time period for the DJIA ETF (DIA) below the Oscillator chart for further clarity. I marked the five previously most oversold readings with stars. Four of those periods were followed within days by major upturns in the broad market.
The outlier, marked on the charts with the yellow star, saw a 30-day bounce that was then followed by a 45-day fairly significant decline. I’d call that signal a draw. Six months later the indices were flattish. Twelve months later the indices were much higher.
Being right 80% of the time can make you a lot of money in this game. The trick is to think in terms of months rather than hours or days. What has changed fundamentally since Mid-May to justify all the sudden negative vibes? Nothing much, unless you are basing your buy-sell decisions on Japan’s Nikkei 225 index. What will you do with the cash generated if you sell your stocks? If you are like most traders, you will put it back into equities again once some indicator tells you it is safe to get back in.