Remember me
Editor's Note: The following article was written by Raymond James Chief Investment Strategist Jeff Saut.“She’s got legs, she knows how to use them.” The year was 1990 and the group was ZZ Top. Except in this case, I'm not talking about the hit song, but rather the stock market; for after a somewhat “kiss your sister”-type session, the Dow put “legs on” to the upside late last Friday. “She’s got legs” indeed for the session may have locked up the lows, at least on a short-term basis. To be sure, the sequence was about right following the crashette of May 6 at ~1066 based on the S&P 500 (SPX). Recall after that “flash crash” we got the perfunctory one-to-three-session stabilization/bounce followed by the downside retest of that ~1066 intraday low. As stated, sometimes said low is marginally violated, but most of the time it's not. Obviously, the SPX’s May 6 low was violated last week by Friday’s intraday low of 1055.90. Accompanying that low, however, were some pretty amazing statistics. For example, according to my friends at Bespoke Investment Group, as scribed last Thursday:
The S&P 500 and all 10 sectors are in extremely oversold territory. We recommend getting long here regardless of your long-term view of the market. Only 6% of S&P 500 stocks are trading above their 50-day moving averages. Only one percent of the Financial sector stocks are above their 50-DMAs, while not one single Energy stock is above its 50-DMA. (Moreover) The S&P 500 is currently three standard deviations below its 50-DMA. We believe the February lows will hold, and this market will bounce back, at least to its 50-DMA (currently at 1170.89) over the next month or so. At times like these, it may seem like it is more risky to get long than it is to get short, but history has shown that the exact opposite is true.
Well said, Bespoke; and I'd add, at Friday’s lows the SPX was an eye-popping 9.8% below its 50-DMA. Ladies and gentlemen, history suggests that betting on the downside when the SPX is more than 6% below its 50-DMA is a bad bet! And then on Friday there was this from Jason Goepfert’s brilliant website (www.sentimentrader.com):
1. This is only the sixth time in history the S&P 500 futures have declined five days in a row and then gapped down (by) at least -1%. All five of the others closed above the opening price.2. The total put/call ratio is poised to close at its fourth-highest level since modern reporting began in 1995. The other three were all clustered in late February, early March, of 2007 (right before a 12% rally).3. The Up Issues Ratio is so low, at just under 4%, that only two other days since 1950 can match this bad breadth. They were 9/26/55 and 10/19/87 (the crash), after which we saw vicious short-term bounces.
Of course all of this comes after Jason’s observation of May 7 (as paraphrased by me):On Friday (May 7) the ratio adjusted McClellan Oscillator dipped to an historic reading of -120, the second-most oversold in more than 20 years. Let’s go back to 1940 and look for any other time the Oscillator hit this level of oversold while in a bull market (defined as a rising 200-day moving average on the S&P 500) and see how the S&P performed going forward.
Most Read
Emailed
Latest
Read Full Article »