So, in the spirit of being both anxious and well-educated, let's ask: How oversold are we and what has that meant in the recent past?
I noticed on the Index Indicators site that we have fewer than 30% of SPX stocks trading above their 50-day moving averages. That is pretty rare for a sub-20 VIX market.
Indeed, going back to 2006, we've only had 11 non-overlapping occasions in which fewer than 40% of SPX shares have traded above their 50-day moving averages during a sub-20 VIX market. Those dates were: 7/14/06; 3/2/07; 6/3/11; 4/13/12; 6/26/12; 10/24/12; 6/21/13; 8/27/13; 10/9/13; 1/24/14; and 4/11/14. When we look 20 days forward, the cash SPX was up 9 times, down twice for an average gain of 2.98%.
I then looked at first time occasions in a month (same non-overlapping criteria) in which we registered fewer than 30% of stocks trading above their 50-day moving averages in a sub-20 VIX market. It hasn't happened since 2006. In the past week, however, we've seen two such readings.
When I extended the search to markets in which VIX < 22, then there were seven non-overlapping occasions in which fewer than 30% of stocks traded above their 50-day moving averages. Four were up after 20 days and three were down. Several of those occasions took place relatively early in the process of larger market selloffs: 7/22/08; 6/15/11; and 5/14/12.
Buying dips in market uptrends (low VIX) has generally brought positive returns. When dips fail to sustain a bounce, however, it's one early sign that markets that are oversold on shorter time frames are in the process of becoming oversold on longer ones. At least with respect to sub-20 VIX markets in recent market history, this market is not only oversold, but uniquely so.
Further Reading: Tracking Market Strength and Weakness
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