Monday, December 1, 2008

Oversold is a Relative Phrase

We are currently experiencing the practical application of the old adage "Markets can stay irrational, longer than you can stay solvent". Or perhaps today's version, "Markets can get oversold and remain oversold longer than you can remain solvent." Many of the traders in the past year have received a crash course in this axiom. Their guidposts that they follow on a daily and weekly basis have become the Bonneville salt flats. Wide open, barren, desolate, hard and fast if you find momentum.

I think traders looking for a sustained rally here may be asking for too much. Isn't everyone from Barton Biggs to Marc Faber waiting for that? Granted Barton Biggs has been saying that for no less than a year and a half, I firmly believe that on a longer term trading horizon (weeks and months) the carnage in the financial sector (BKX) foreshadows considerable downside to the overall market. The fact that this is a financial crisis of the likes there are few comparisons, and that the financials constitute the single largest (~16%) percentage of the S&P 500, it should be no surprise that the 2002 lows will be substantially violated; and I am not talking about 741 verses 768. We are talking about a possible 40% decline from the lows.

And for those of you glancing at the shocking depths of these rsi readings on the S&P 500 and speculating that the only move from here is up, check no further than the BKX chart. It has been in the red-zone (<30) for more or less a year. Comparatively, the S&P has only been in the red-zone since October.

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