What Happens When Stocks Are Extremely Oversold?

  • Markets
  • Michael Gayed

On Monday, only 1% of stocks in the S&P 500 closed above their 50-day moving average. That was one of the most extreme oversold conditions in history.

In the past 15 years, the only other times when stocks were this oversold: July 2002, October/November 2008, and August 2011. The short-term results following these data points are mixed, with bounces over next 5-10 days but lower levels on average looking ahead 3 months. One year later, though, the S&P 500 was positive 100% of the time with an average return of 23%.

Data Source for all charts/tables herein:

Does an extreme oversold market mean the low is in? Not necessarily…

1) In July 2002, there were a series of oversold readings. From the last one, the S&P 500 would rally almost 25% before giving it all back. The ultimate low was not reached until October 2002.

2) In October/November 2008, there were a large number of extreme oversold readings. The S&P 500 would bounce roughly 24% and 27% after two of these readings, only to give back all of these gains. The ultimate low did not occur until March 2009.

3) In August 2011, there were a few extreme oversold readings. The S&P 500 would rally almost 12% after one of these before giving it right back. The ultimate low was reached in October 2011.

What will happen this time around?

The 5-10 day bounce is off to a good start, with the S&P 500 rallying 116 points on Wednesday, its largest point gain in history. The 4.96% advance was its largest percentage gain since March 23, 2009.

If we follow the 2002, 2008, and 2011 examples, an oversold bounce could very well continue in the coming weeks. But any such bounce is unlikely to be a straight up move to new highs. There are likely many sellers waiting up above, hoping for the chance to get back to even. This will create resistance in the near term, with wild swings back and forth likely. If there’s one truism in markets it’s that volatility begets volatility.

For long-term investors extreme oversold conditions are unquestionably a welcome sign. Stocks are on sale, valuations are cheaper, and prospective long-term returns have improved. For short-term traders, the outlook is much less certain. While a near-term bounce is likely, it may not hold if history is a guide. At the very least, we should expect the next few months to be a choppy ride. Buckle up.




Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Charlie is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Charlie holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and also holds the Certified Public Accountant (CPA) certificate.

In 2017, Charlie was named the StockTwits Person of the Year. He has been named by Business Insider and MarketWatch as one of the top people to follow on Twitter and his work has been featured in Barron’s, Bloomberg, and the Wall Street Journal.

You can follow Charlie on twitter here.


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The information herein was obtained from various sources. Pension Partners does not guarantee the accuracy or completeness of such information provided by third parties. The information given is as of the date indicated and believed to be reliable. Pension Partners assumes no obligation to update this information, or to advise on further developments relating to it.

The S&P 500 is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. An index is an unmanaged portfolio of specific securities which is often used as a benchmark in judging relative performance of certain asset classes. An index does not charge management fees or brokerage expenses and no such fees or expenses were deducted from the performance shown.

Past performance is not indicative nor a guarantee of future results.

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