The market’s 5% pull-back combined with rising corporate earnings had driven the Standard & Poors 500’s trailing 12-month P/E to a lower level than at its dead low last November.
The previous five times the broad index touched, or broke below, its 50-day moving average we experienced significant v-shaped rallies. The most recent low was the most extremely oversold condition since last November.
That was especially true in the Nasdaq where Apple (AAPL), the largest single component, had tainted the overbought/oversold level to really bearish readings.
The chart was generated pre-opening on Wednesday, June 26, 2013.
Chart Source: Helene Meisler Real Money Pro @ The Street.com
Buying when others are panicking feels scary. It almost always turns out to be the right move. Note the correlation of grossly oversold conditions and the S&P 500’s future direction over the following few months.
Extreme bearishness seems to provide a better guide (fewer false signals) than do the very overbought conditions.
See my Value Investment newsletter here http://marketshadows.com/value-investing
Dr. Paul Price June 27, 2013
About the author: