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Panic Attack! Markets Extremely Oversold

Written by admin | Apr, 8, 2013

sp500-running-redThe best buying opportunities tend to come when there is blood in the streets and today the streets are literally running red as seen by the heat sector map.    There are two bad takeaways from this first of all which is that 90% downside days usually mean that the selling is not over and the second is that volume has been ramping on this sell off as computer programs are triggering one sell order after another.

However, there are also some positives to be derived from today’s action from a technical basis.   First of all the number of stocks on “buy signals” are now plunging to levels that we haven’t seen since the last financial crisis.  The levels of bullish to bearish sentiment are very “bearish” currently and the number of new highs to new lows is extremely negative.   Most importantly the market, as we showed in our recent posting, is more than 3 standard deviations oversold which generally means that a snap back rally is in the offing.

Our proprietary risk ratio indicator is still flashing a warning signal at the moment, however, is now getting to levels that are more normally associated with intermediate term bottoms.   We posted this indicator a couple of weeks ago and stated then that; “While this indicator is very slow to move because it is built on weekly data – it has been a good overall risk management tool for the increasing and decreasing of portfolio risk associated with market movements.”

sta_risk_ratio_080811The indicator is a weighted average of volatility, bullish to bearish sentiment, advances versus decliners and price momentum which is then smoothed to give an indication of market risk.

Back in April when we first published this indicator to the public we addressed that it was time to remove money from risk assets and overweight cash and fixed income.   This has provided a good hedge for the summer volatility up to this point.   Now, the markets are beginning to show enough weakness to begin hitting our radar for a potential buying opportunity within the next couple of months provided some crisis doesn’t assert itself and push the markets into panic mode.  

We will watch our indicator closely and look for it to turn UP from some level which will be our indication to begin increasing risk based assets to portfolios.  Caution is still advised as all of our signals are still on a SELL signal at the current time.   We still recommend an overweight position in cash and fixed income at the current time and underweight equities with a bias to lower volatility, defensive positions.   If you are still heavily weighted in equities we recommend using subsequent rallies to rebalance portfolios to more defensive allocations until the volatility subsides.

Remember – in order to survive the LONG RUN investing game it isn’t about the upside opportunities that you miss that count – it is the downside losses you capture that do.

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