Tuesday, August 9, 2011

Oversold Stock Prices Reflect Depressed Sentiment

Yesterday I urged the purchase of stocks because their prices had become "oversold," or they had fallen too sharply and were likely to rebound.  One of my favorite sentiment measures for the stock market had fallen to a level that reflected the highest degree of pessimism since March, 2009, when stock prices began a two-year rise that culminated with prices nearly doubling.  

Anecdotal signs also suggested a rebound.  When stories such as yesterday's "8 Trading Strategies for a Stock Market Crash" appear, it is likely that the bottom--at least for the near term--has occurred.

Despite my view that a short-term rebound will continue, it is important to remain disciplined and not chase prices that seem to be running away.  Set target purchase prices for your favorite stocks and be disciplined in waiting.  If the price doesn't come down to your point of attractive value, look elsewhere.  I expect significant volatility that might provide similar buying opportunities to those of the last few days.

Steve Lehman

S & P 500:  1172

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