STOCKS HAVE RARELY BEEN THIS OVERSOLD & WHY S&P500 2500 IS CRITICAL
Stocks have rarely been this oversold. TPA monitors the percent of Russell 3000 stocks (approximately 98% of all U.S public stocks) that are trading above their 200-day moving average (DMA) on a daily basis. As of the close yesterday, 5.2% of the Russell 3000 stocks are trading above their 200DMA. TPA’s analysis in the table and chart below go back to 1/1/95 or over 25 years and as far back as we could get data. The only occurrences lower than Thursday’s number occurred during the 2008-2009 Financial Recession (see chart below).
TPA used 15% of the Russell 3000 stocks below their 200DMA as a hurdle rate for its analysis. Over the past 25+ years there have been 15% or fewer Russell 3000 stocks trading below their 200DMA only 154 times, which is just 2.44% of the total days in the 1995-2020 period (6,323 days).
TPA then looked at how the Russell 3000 performed in 5 periods following an occurrence of 15% or fewer stocks trading above their 200DMA (5, 10, 20, 30, and 40 days after). That makes 770 measurement periods. Of those 770 periods 351 showed negative performance or 45% of the time. A closer look at the performance numbers, however, shows that 345 of those occurrences or 98% occurred during the 2008-2009 period. There were only 6 negative periods that were not in the 2008-2009 period.
The question clients need to consider is whether or not we now face a 2008-2009 situation. In that period, buying an oversold market was basically a coin toss. If we are not in a 2008-2009 type market, the odds are very good for a rally.
One possible indicator of what happens next for the long term, is the very long term (11 year) support line for the S&P500 (chart below). As TPA said in an intraday note yesterday, the 11-year uptrend line is currently at around 2500. The uptrend from the close on 3/9/09 is a statement about the 11-year bull market. A violation of that uptrend signals that there could be a long term change. Conversely, if the long term uptrend can hold, we are probably not in a new more negative environment and the investing rules that paid off in very other period other than that of 2008-2009, will most reoccur.