Buy Oversold, Sell Overbought

During the month of September the market became overbought and never pulled back much. The reason I believe the market was able to do so was that market participants were "de-risked" at the end of August as pessimism was extreme. That gave participants a lot of room to buy.

Over the month of September sentiment has normalized and it stands to reason that equity allocations are higher as the chatter is growing louder that the market is a win/win. One can even make a case that short term sentiment has turned too bullish. Now that equity allocations are at normal levels, I believe that we will see more two way action. That means I will look to sell when we are overbought and look to buy when we are oversold.

We have gone sideways for the past two weeks making us neither overbought nor oversold at the current juncture. I am waiting for the bulls or bears to push things too far before making any strong directional bets.


Anonymous said...

do you think something is cooking with biotech?

Tsachy Mishal said...

A Genzyme deal would be a definite positive. I dont understand merger arb but the price of Genzyme is up on news of Sanofi's hostile deal so I suppose we are a step closer to a deal.

Anonymous said...

microsoft downgrade?

Tsachy Mishal said...

My biggest issue with MSFT has been that tablets will steal market share from Windows and I was not sure how aware people were of that(I believe the stock is cheap even so).

The risk from tablets was mentioned in the downgrade so I am more confident that it is being priced in. GS throwing the towel in is also a positive from a sentiment perspective. Most of their gripes against MSFT have been true for a long time and there is not much new, so it seems more of a can't take the pain of being wrong downgrade.

I would strongly consider purchasing MSFT once the market is oversold.