Stocks at Extreme Oversold Levels
Stock-Markets / US Stock Markets Jul 06, 2008 - 01:48 AM GMTBy: Mike_Burk
The good news is: The market is very oversold and likely to bounce (No change).
Short Term Overbought - oversold is a description of a price move within a given time frame. Currently the market is oversold by virtually any measure over any time frame.
The chart below covers the past year showing the S&P 500 (SPX) in red and an indicator that is calculated by subtracting the number of times the NYSE advance - decline line (NY ADL) has been down for 2 consecutive days from the number of times it has been up for 2 consecutive days over the past 21 trading days. The NY ADL is a running total of the number of NYSE declining issues subtracted from advancing issues. Dashed vertical lines have been drawn on the 1st trading day of each month.
This indicator is at its lowest level since the July 2002 low several months ahead of the 2002 bottom. From the July 2002 low the SPX rallied 20.7% in a month before falling to its final low about 2 months later.
The chart below shows the 2002 period.
Intermediate Term
The ambiguity over whether or not we should expect a retest was resolved last week when the NYSE recorded 652 new lows on Wednesday and the NASDAQ recorded 453.
The chart below covers the past year showing the NASDAQ composite (OTC) in blue and a 10% trend (19 day EMA) of NASDAQ new lows (OTC NL) in black. OTC NL has been plotted on an inverted Y axis so decreasing new lows move the indicator upward (up is good).
Last week the indicator fell below its March low.
The next chart is similar to the one above except it shows the Russell 2000 (R2K) in red and new lows have been calculated from the component issues of the R2K over the a trailing 6 week period rather than 52 weeks as reported by the exchanges.
The pattern is similar to the above chart except the lowest low for NL was recorded last August and the current level for NL is only slightly above the level of last August.
The next chart is similar to the one above except the index is the SPX shown in red and NL has been calculated from the component issues of the SPX over a trailing 6 week period.
This indicator is at its lowest level since just ahead of the 2002 bottom.
The extreme levels of new lows imply a high probability of a retest of the current low.
Seasonality
Next week is the week prior to the 2nd Friday of July during the 4th year of the Presidential Cycle.
The tables show the daily return on a percentage basis for the week prior to the 2nd Friday of July during the 4th year of the Presidential Cycle. OTC data covers the period from 1963 - 2007 and SPX data from 1953 - 2007. There are summaries for both the 4th year of the Presidential Cycle and all years combined. Prior to 1953 the market traded 6 days a week so that data has been omitted.
By all measures the coming week has had, on average modest returns and the 4th year of the Presidential cycle has been weaker than the average.
Report for the week before the 2nd Friday of July.
The number following the year is the position in the presidential cycle.
Daily returns from Monday to 2nd Friday.
| OTC Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1964-4 | 0.05% | 0.15% | 0.22% | 0.20% | 0.37% | 0.98% |
| 1968-4 | -0.06% | 0.19% | 0.00% | -0.20% | -0.28% | -0.35% |
| 1972-4 | -0.49% | -0.29% | -0.28% | -0.83% | 0.27% | -1.62% |
| 1976-4 | 0.00% | -0.29% | -0.02% | 0.21% | 0.76% | 0.66% |
| 1980-4 | 1.03% | 0.32% | 0.03% | 0.94% | 0.78% | 3.10% |
| 1984-4 | 0.11% | -0.31% | -0.61% | -0.26% | 0.19% | -0.87% |
| Avg | 0.15% | -0.08% | -0.22% | -0.03% | 0.34% | 0.19% |
| 1988-4 | 0.00% | 0.36% | -0.17% | -0.01% | -0.28% | -0.09% |
| 1992-4 | 0.43% | 0.88% | 0.05% | 0.13% | -0.98% | 0.49% |
| 1996-4 | -0.83% | 0.42% | -1.06% | -3.08% | -0.25% | -4.80% |
| 2000-4 | -1.07% | -0.60% | 3.62% | 1.84% | 1.71% | 5.50% |
| 2004-4 | 0.00% | -2.15% | 0.13% | -1.56% | 0.57% | -3.01% |
| Avg | -0.49% | -0.22% | 0.52% | -0.54% | 0.15% | -0.38% |
| OTC summary for Presidential Year 4 1964 - 2004 | ||||||
| Avg | -0.10% | -0.12% | 0.19% | -0.24% | 0.26% | 0.00% |
| Win% | 50% | 55% | 50% | 45% | 64% | 45% |
| OTC summary for all years 1963 - 2007 | ||||||
| Avg | 0.02% | -0.14% | 0.17% | 0.24% | 0.41% | 0.69% |
| Win% | 69% | 47% | 57% | 64% | 76% | 64% |
| SPX Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1956-4 | 0.44% | 0.60% | 0.31% | -0.23% | 0.29% | 1.41% |
| 1960-4 | 0.00% | -0.07% | -0.14% | 0.53% | 0.24% | 0.56% |
| 1964-4 | -0.06% | -0.30% | 0.34% | 0.36% | 0.44% | 0.78% |
| 1968-4 | -0.08% | -0.55% | 0.00% | -0.26% | -0.97% | -1.85% |
| 1972-4 | -0.53% | -0.73% | -0.40% | -0.57% | 0.49% | -1.75% |
| 1976-4 | 0.00% | -0.55% | 0.28% | 0.14% | 0.96% | 0.84% |
| 1980-4 | 1.84% | -0.59% | 0.28% | 1.51% | 0.49% | 3.53% |
| 1984-4 | 0.74% | -0.31% | -1.52% | -0.35% | 0.57% | -0.88% |
| Avg | 0.49% | -0.54% | -0.34% | 0.10% | 0.31% | -0.02% |
| 1988-4 | 0.00% | 1.48% | -1.37% | -0.09% | -0.65% | -0.63% |
| 1992-4 | 0.06% | 0.68% | -0.14% | 0.11% | -0.46% | 0.24% |
| 1996-4 | -0.75% | 0.34% | 0.20% | -1.59% | 0.08% | -1.71% |
| 2000-4 | -0.22% | 0.36% | 0.81% | 0.19% | 0.95% | 2.09% |
| 2004-4 | 0.00% | -0.81% | 0.19% | -0.82% | 0.33% | -1.12% |
| Avg | -0.30% | 0.41% | -0.06% | -0.44% | 0.05% | -0.22% |
| SPX summary for Presidential Year 4 1956 - 2004 | ||||||
| Avg | 0.16% | -0.03% | -0.10% | -0.08% | 0.21% | 0.12% |
| Win% | 44% | 38% | 58% | 46% | 77% | 54% |
| SPX summary for all years 1953 - 2007 | ||||||
| Avg | -0.03% | -0.03% | 0.13% | 0.11% | 0.27% | 0.47% |
| Win% | 59% | 45% | 56% | 59% | 67% | 64% |
Conclusion
The market is as oversold as it has been at any time in the last 10 years. A bounce is likely and it could be of significant magnitude. Following the bounce a retest of the current low is likely.
I expect the major indices to be higher on Friday July 10 than they were on Friday June 3.
Last weeks positive forecast based on an oversold market hitting support was a miss.
Thank you,
By Mike Burk
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Disclaimer: Mike Burk is an employee and principal of Alpha Investment Management (Alpha) a registered investment advisor. Charts and figures presented herein are believed to be reliable but we cannot attest to their accuracy. Recent (last 10-15 yrs.) data has been supplied by CSI (csidata.com), FastTrack (fasttrack.net), Quotes Plus (qp2.com) and the Wall Street Journal (wsj.com). Historical data is from Barron's and ISI price books. The views expressed are provided for information purposes only and should not be construed in any way as investment advice. Furthermore, the opinions expressed may change without notice.
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