Recent Rally: No Surprise
By Paul Price of Market Shadows
The rally did not surprise value investors
The market’s very sharp 5% pull-back, combined with rising corporate earnings had driven the Standard & Poors 500’s trailing 12-month P/E to a lower level than when the index hit its low last November.
The S&P 500 chart below was generated pre-opening on Wednesday June 26, 2013. The last five times the broad index touched, or broke below, its 50-day moving average, the index experienced significant v-shaped rallies.
The most recent low was the most extremely oversold condition since last November. That was especially true in the NASDAQ, where Apple, the largest single component, had tainted the overbought/oversold oscillator to extraordinarily bearish readings.
Chart source: Helene Meisler Real Money Pro @ The Street.com
Buying when others are panicking usually feels scary. It almost always turns out to be the right move. Note the correlation of grossly oversold conditions and the S&P 500’s future direction over the following few months.
Severe oversold conditions (a measure of extreme bearishness) are better signals for buying than very overbought conditions are signals for selling.
