Not At An Extreme

I have been highlighting how the market is close to becoming maximum oversold. That remains the case and I would expect that if we go down at the beginning of this week we will be very oversold and poised for a rally at minimum. However, an argument can be made that we are not yet at an intermediate term low.

Once or twice a year sentiment indicators typically reach an intermediate term extreme in negativity. After a rally that had stretched for six months its possible that we are headed for such an extreme. While sentiment is negative it is not at what I would characterize as at an intermediate term extreme.

The most troubling indicators for the bulls are the Investors Intelligence bears and Rydex traders. Investment Intelligence bears are at a very low reading of 20%, a reading typically seen at highs. The bulls are at 39% which is low as well. The reason both bears and bulls are low is because most investors are in the correction camp. Overall, I would characterize the Investors Intelligence numbers as neutral to slightly bullish but not at the type of extreme seen at good lows. Rydex traders have 4.5 times as much money in bullish funds as in bearish funds. There is no way to paint that as anything but bearish.

Overall the indicators are pointing to bearish investors and a market that is becoming oversold. This is a big positive change from what we saw at the end of March when investors were excessively bullish. But it is not yet enough to be confident that we are at an intermediate term low.

1 comment:

The Oversold Rally Is Nearing said...

[...] a rally. Unfortunately, there are also some troubling signs such as expanding new 52 week lows and sentiment indicators that have not reached intermediate term extremes. That likely means that the rally will have  a difficult time travelling too far and that we are [...]