Friday, November 9, 2012

Stocks Are Oversold, But Is That Enough?

The 6% decline in stock prices since mid September has left major indexes oversold.  Two key indicators, the Money Flow Index and the Relative Strength Index, have reversed from their mid-September levels and now show stocks to be oversold.  

Both indicators showed the market oversold in early June, and the S & P 500 gained 15% from that point.  After those indicators showed the market overbought in September, the S & P declined 6%.  

The S & P 500 now has declined back to its 200-day moving average, which last happened in early June, before a 15% rise in the index.  Has the recent decline in stock prices merely corrected an overbought condition that will soon lead to renewed gains in stocks?  Or, will the decline continue below the moving average, which would likely lead many momentum investors to sell and exacerbate the decline?

I think the odds favor a rebound, with the possibility of an explosive rally if elected officials take meaningful action on fiscal issues.  I would not be short the market here, or even hedge long positions.

Steve Lehman

S & P 500:  1384

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