The S&P500 has given up almost all of its gains for the year, is down 7.9 percent since May 1st, and has fallen 11 of the 13 trading days during the month.  The S&P500′s Relative Strength Index (RSI), which is a momentum indicator that measures the speed and change of price movements,  is currently at 22.97,  a low matched only 19 times since 1990.  When taking into account initial lows and clusters,  the RSI has been down here only 7 times prior to the current reading.

Though we can’t rule out a nice bounce beginning even tomorrow,  it just doesn’t feel like the market has had the big flush which sets up for a decent sustained rally.  This is reflected, in our opinion,  in the relatively low level of the VIX given such low RSI readings (see chart).

Market bearishness is increasing but no panic yet.   Could be wrong.

Stay tuned.



Category: Markets, Technical Analysis

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23 Responses to “How oversold is the S&P500?”

  1. Herman Frank says:

    Oh yeah, oh yeah! Beware of the tail-risk caused by the avalanche thundering down the ever steeper slope!
    Have your stop-losses in place!
    You’ll be “somewhere else” when the slide starts, better to be closed out at -4% then looking at a gaping crevice of 15+% because “I can’t get the order in because the slide is moving too fast and there’s 1mln orders before mine!”

    Remember: “Capital conservation is key!” Minimize the loss to be able to invest again at lower levels; even at higher levels once the upward momentum is strong enough.

  2. techy says:

    I dont see March 2009, is it just me?? can we really talk about oversold without March 2009?

  3. pintelho says:

    I think maybe it’s a divergent signal. Depending on wether you think RSI is a better indicator than VIX at predicting market bottoms. I think what needs to be done is to look at what happened after some of the dates on the chart where Vix was at or below this level. It’s a kick ass chart though thanks for producing it!

  4. PeterR says:

    The morning bounce is feeling a little Dead Cat-ish? Volume low, and yesterday’s SPY high has stopped the advance so far (1:34 EDT). Would like to see VIX at 30 or higher for a more secure market bottom.

  5. pintelho says:

    Yes PeterR because the market always gives us exactly what we want. I say toe dipping to the long side is warranted here.

  6. dead hobo says:

    If it weren’t for Greece and the literal possibility of a central bank going bankrupt in a month or so, I would be full tilt in with some fresh cash today and never have sold last week regardless of the potential loss. Commodity asset bubble bursts are overall good for everyone, so the economy would prosper. So would the markets as soon as the dullards who think high commodity prices are good are flushed out of the way.

    Technicals matter because it takes all kinds to make a market and it’s helpful to know that market pros chase statistics like dogs chase balls.

    I find comfort in their predictability, but need a fundamental reason to do something before doing it. I’m waiting a few weeks unless something big happens in the meantime.

  7. pintelho says:

    When is there not something to worry about?

  8. dead hobo says:

    pintelho Says:
    May 21st, 2012 at 2:34 pm

    When is there not something to worry about?

    Either you’re joking or you confuse titillating rumors with Greek certainties. Greece has the capability to easily bankrupt the ECB and pundits talk about Greece recusing itself from the euro as OK and manageable. This isn’t a wall of worry issue unless you bet like JPM. The S&P might rally to old levels, but that is computer driven or idiot driven. I’m waiting a month. It’s certain Greek elections will crash things up unless it look like some economic pacifists will win. Then cheap commodities will drive the US economy upwards ,unless the oil idiots run amok again and soon. Then higher costs will keep a lid on consumer spending and industrials will remain a gutter sector. I can’t follow the Spanish bank stuff so who knows about that. The only positive in the mix is US economic expansion, with commodity prices as the limiting factor.

  9. cognos says:

    “Could be wrong”…

    Dead Hobo – “Greece has the capability to easily bankrupt the ECB”. (For me, that deserves a nomination for dumbest comment of the year! I might end up competing as well. But this is simply not true and stupid. Greece is 3% of the Eurozone, roughly the size of Ohio. Its has the ability to bankrupt NO ONE. Now contagion could happen… so could recovery and a boom.

    But Greece is already bankrupt. And the ECB and Europe is basically just fine… The future is up certain, up or down. Thats why we speculate. (Buy more AAPL).

  10. 4whatitsworth says:

    I am putting back some the cash I took out on the way up. If It drops another 10% I will move some of my high yeild bonds into the S&P.

  11. dvdpenn says:

    My projections had me looking for a bottom between 1326-1316, so I’m comfortable wading into the water on the long side down here. I use the short-term RSI (2 periods instead of 14), which makes this correction comparable to the one in the first half of August 2011 in terms of extreme oversold conditions.

  12. NMR says:

    Dead Hobo – “Greece has the capability to easily bankrupt the ECB”. (For me, that deserves a nomination for dumbest comment of the year! I might end up competing as well. But this is simply not true and stupid.

    Dumbest comment of the year? Maybe? But it was definitely up there. Greece is a pimple on an elephant’s bum, the danger as you say is contagion. I don’t start from the premise that all the bankers and economics ministries in Europe, particularly Germany, are complete idiots although I know this is a core belief of the blogging classes. If Grexit it’s going to be a mild shitstorm but these guys have spent the last year preparing for it. In fact I’ve come the conclusion Grexit might be best but I have a feeling the Greek voters minds might get concentrated wonderfully with the prospect of being hanged.

  13. dead hobo says:

    cognos Says:
    May 21st, 2012 at 3:55 pm

    “Could be wrong”…

    Dead Hobo – “Greece has the capability to easily bankrupt the ECB”. (For me, that deserves a nomination for dumbest comment of the year! I might end up competing as well. But this is simply not true and stupid.

    According to various articles, the ECB owns from 100B euros to maybe 300b euros of Greek debt, probably closer to 300b than 100b. If Greece leaves the euro due to a hissy fit about having to pay its bills, the ECB can consider that debt in default. the ECB CAPITAL is close to the amount of Greek default. I think you are looking at ASSETS and confusing that with CAPITAL If Greek debt causes all that CAPITAL to vanish, this will necessitate a capital call to the EU. Hence, my concern.

    Please comment if you can claim authoritatively that the amount of Greek debt owned by the ECB does not approach the total amount of CAPITAL (Assets less Liabilities) of the ECB.

  14. dead hobo says:

    Cognos or others,

    Remember the debt quick step the ECB did with Greek debt when the last debt crisis hit a couple of months ago? It put Greek debt in a class that was not in danger of default if Greece acted out. It was an accounting fiction that allowed default to be ignored if the worst happened. If Greece officially defaults, this will cause the ECB to either follow basic accounting rules and write it down to probably zero or invent a new accounting fiction that makes the Greek debt look solid. The ECB has a balance sheet like any other entity. With no capital, it’s toast.

    So, explain how a Greek exit would be just a little manageable thing. It’s happy talk, or foreshadowing of a massive money print, or Greece will take its medicine, or I’m missing something.

  15. cognos says:

    $300Bln causes the bankruptcy of the EUROPEAN CENTRAL BANK (thats “E-C-B”).

    You are in some strange LA-LA land. Like the guy said above… “pimple on an elephant’s bum”.

    $3T… prob not.

    $30T… yeah, thats “bankruptcy” for the ECB.

    Central Banks are quite difficult to “bankrupt”… they just write checks. You don’t seem to understand the basic CB process… You don’t seem to understand the GDP of Europe or the asset value in European countries. Smarter analysis says that Greece has far more state assets than debt. This is a “political” issue… not a wealth issue.

  16. cognos says:

    Dead Hobo -

    Do you get your facts from Zero Hedge? SERIOUSLY! This is irresponsible and financially costly BULL SHIT!

  17. cognos says:

    A few quick google search show (what is obvious to a generalist… it takes $Ts to bankrupt a major central bank)…

    From the basic ECB website:

    The capital of the ECB comes from the national central banks (NCBs) of all EU Member States. It amounts to €10,760,652,402.58 (as of 29 December 2010).

    THAT $10TRILLION. Come on. Europe is a big wealthy place.

    Seconardily… the ECB holds about $50Bln of Greek debt (the huge $200bln chunk 85% swapped for 30% long term bonds a few months ago). Greece bankrupts NO ONE!

  18. cognos says:

    Its very hard to make money in financial markets… when you are not good with facts and #s.

  19. cognos says:

    OK. So I hope no one notices the basic #s mistake there (head in sand!) But still, my main point is correct.

    Here is a good supporting primer:

    The ECB cannot go broke – get over it –

    The key statements are:

    Consider the US Federal Reserve which could easily buy all the outstanding US federal government if it wanted to and if the Federal Reserve lost capital it could simply issue new currency to replenish it.

    (But of course… could never “lose capital” because it just sends all interest back to Treasury… right?!)

    The same logic goes for the ECB – it alone creates the Euro currency. It can never go bankrupt.

  20. cognos says:

    The broader basic point… is that you don’t seem to understand “WEALTH”.

    Roughly the “net wealth” of both the Eurozone and the US are $50T each.

  21. dead hobo says:

    capital = 85 billion. See link. Recapitalization is possible. Refer to acct 101 for more info.

  22. bear_in_mind says:

    @cognos: Me thinks thine doth protest too much.

    If you can’t discern the damage a Greece default would have on already-hobbled banks in Spain, Portugal and Italy, not to mention the carry-over to France, Ireland, Morgan Stanley, etc…. well, Party-on Wayne! Party-on Garth!

    That is all.

  23. pintelho says:

    How did a string starting with a technical chart end up talking about Greek default..and did someone actually use the term Grexit?! HA! I heard that shit on Bloomberg this morning and it’s already viral.

    Anyway, this is what’s happening in Greece (which is bankrupt). ECB is bailing out banks not Greece. You see every quarter or so Greece owes some banks some interest. It has no money to pay these banks so Banks holding Greek bonds are made whole by the ECB. It’s Socialism you see…but the beneficiaries are “capitalist” banks who don’t want to take the loss they deserve to take because they took the risk…

    And I think as of last quarter the committee in charge of saying whether or not this activity causes CDS to trigger said…it didn’t….so…CDS wont trigger so contagion is contained.

    Oh then the bankers who are worried that next time the ECB will say no get on Bloomberg and other media outlets a few weeks before this cycle and say “The Greek people need to stop sucking the government Teet! And they need to get their asses to work to pay higher taxes.”

    heh…Anyway that’s why its better to just look at the charts and kill your teevee…cuz everyone is lying to you on that thing.