Mid-week market update: I had expected to begin to wind down and relax for the holidays this time of year. Instead, we got a bloodbath in the stock market.
To say that the market is oversold is an understatement. Sure, standard measures indicate oversold conditions, such as the VIX Index had risen above its upper Bollinger Band. Interestingly, the VIX Index failed to rise today despite the carnage in the stock market, which could be a sign of hope for equity bulls.
The Fear and Greed Index is also showing extreme conditions.
Oversold markets can become more oversold. How oversold? This report from UBS puts the velocity of the sell-off into context.
Here is the full chart from UBS:
Here is what happened next. Out of the 14 instances, 8 of the following years saw very positive returns of +12% to +44% while 6 saw very negative returns.
SentimenTrader also found that returns in the following quarter tends to be positive, though it is difficult to generalize with such a small sample size.
In other words, expect fat-tailed performance in the coming year. For what it’s worth, the stock market weakness created a Zweig Breadth Thrust oversold condition, which is a setup for a possible ZBT buy signal. Should the market rebound sufficiently to achieve a breadth thrust in the 10 trading days after the recovery from the oversold condition, it would generate a rare ZBT buy signal indicating positive momentum. Even without a ZBT buy signal, such oversold conditions can be useful signals of a market that is stretched to the downside.
My inner investor has de-risked his portfolio, but my inner trader remains bullishly positioned in anticipation of a relief rally, but he is feeling the pain and getting very nervous.
Disclosure: Long SPXL