Thursday, October 9, 2008

Failure to Launch

Almost all of my overbought and oversold indicators that I apply to various indices and ETFs are screaming “oversold!” at the moment. One index in particular, the S&P 400 MidCap Index, stands out among the crowd. The MidCap Index, which has an ETF that trades under the ticker MDY, has been in existence since 1995. The chart below, courtesy of Yahoo, shows the performance of that index over the past 15 years. If you are looking for an overbought/oversold indicator, the 21 day rate of change (ROC) indicator is a good one. Looking at the ROC for 2008, notice how the current readings are the third time this year that the ROC set a new record for negative ROC. Also, the current reading of -33.95 is more than double what had been seen prior to this year.

With all of the oversold extremes, there will certainly be at least a short-term bounce soon. The fact that it has not happened yet is particularly interesting and means that more rocket fuel is building up for that bounce. For now, however, the failure to launch says as much about the investor psyche as anything else. Only in a market with a VIX approaching 60, would a market be too fearful to bounce.

Sometimes it is what the markets don't do that speaks volumes...

[source: Yahoo]


Mikkel said...

As much as I'm itching to take advantage of this level of being oversold (which based on a little research looks to be more the most oversold ever from a "next leg down" perspective) a couple things really need to get resolved first.

CDS unwind for Lehman is huge, and well TED spread needs to at least drop under 3%.

The fact that they have injected literally over a Trillion dollars the last couple weeks and there is still no short term lending shows that something is massively, horribly wrong. If there is a large adverse event then even companies like GE are at risk from defaulting on short term debt...and they are saying as much.

Bill Luby said...

All excellent points, Mikkel.

The CDS unwind and the hedge funds delevering and dealing with redemptions are, IMHO, significant barriers to a turnaround. The restrictions on shorting financials probably made the situation worse too.

Frankly, I thought the Fed's Commercial Paper Funding Facility would help, but it has barely moved the needle.

I suspect there are too many "adverse feedback loops" at work right now...but once the first one or two of these are broken, some of the other pieces might start to snap back into place.

Cheers and thanks for the comment,


bzbtrader said...

You called it. VIX currently over 60 1/2 hour before the close and no relief in site. Unlikley Friday will be bullish with the long weekend ahead, so VIX 80 may indeed come to past if the plunge continues.

Anonymous said...

What technical indicators are most accurate in determing oversold market conditions? What websites should one review to obtain readings and/or graphs of these indicators?

Bill Luby said...

Regarding oversold signals, this is a large subject and one I am going to have to save for a future post.



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