How Oversold Are We?

Once in a while you get shown the light

in the strangest of places if you look at it right.

--Jerry Garcia

I mentioned for the market to rally, we needed some sort of catalyst. But who would have thought that the catalyst would come from GM. GM! Go figure. They announced that their sales were better than expected, and the stock rallied 10% and jumpstarted the market.

That led to a wave of short covering, and the major indexes rallied and all finished in positive territory. Volume rose on the day, making for a solid reversal. Now all we need is some solid follow-through for the oversold rally to continue.

So how oversold are we? Here are some anecdotal datapoints:

• The advance/decline line has been negative in 10 of the last 11 sessions.
• The S&P oscillator hit -9.4, the most oversold reading since July 2002, which was a major low in the mkt (even as it was undercut in October 2002)
• Jeff Saut tracks what he calls "selling stampedes", and said that this stampede has gone on for 30 days, an extremely rare occurrence
• The % of stocks on the NYSE trading above their 50-day averages is back at levels seen at the March '08 lows (see graph below)

Also, the chart below is a volume-based oscillator that Helene Meisler at TheStreet.com publishes daily. You can see that it is now more oversold than it has been at both the Jan and Mar '08 lows, as well as the Nov. '07 lows.

So the conditions are setup for a nice oversold rally. To my critics, I never said I would be able to perfectly call the exact day the market would bottom. What I did say was that I wanted to use further upcoming weakness to add long exposure to the market, since historically these oversold readings have proven to be good trading opportunities.

Have a good night--