Monday, May 14, 2012

Failure to Bounce Puts SPX in Abnormal Market

Despite reaching a short-term oversold condition several days ago, the market has failed to mount any kind of substantial bounce. I looked at this a number of ways over the weekend and in the subscriber letter last night. One study I conducted looked at other times the SPY was above the 200ma and after registering a sub-5 RSI(2) it failed to get above 30 for 5 straight days. (The sub-5 RSI(2) 1st occurred on 5/4 and the 5 straight days under 30 commenced on 5/11.) This is the 1st time ever. It has managed to do it 3 times when the SPY was below its 200ma, and I have listed those below.

The bottom line is that we are in uncharted territory. Quantitative analysis is great at helping us to identify high-percentage situations. Those are times when you often want to bet big. But when we go beyond “oversold and likely to bounce” to “oversold and acting in a way never seen before”, it suggests caution to me. We are in an abnormal market and keeping bets smaller is often a good idea under abnormal conditions.

No comments: