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Jun 06, 2012, 03.25 PM IST
Sometimes "oversold" means "sell more." The S&P 500 Index was hit by a double whammy in the past few days. On Friday, the index fell below its 200-day moving average for the first time in nearly five months. Then on Monday, the index at its worst point fell more than 10 percent from its April 2 peak.
Both, according to chart-watchers, are ominous signs for those hoping that the recent selloff was going to be brief.
The S&P 500 Index, which closed on Tuesday at 1,285.50, has now given up most of its gains this year. With the two recent bearish signals, investors are not willing to actively snap up beaten-down shares just yet.
Strategists who look at technical yardsticks, including moving averages and momentum indicators, mostly see a tough road ahead for US equities.
Fears that the euro-zone debt crisis is worsening, dragging on growth in the United States and Asia, have set US and global markets on a downtrend.
Friday's fall below that key 200-day moving average - a gauge of the long-term trend in the market - was a trigger for further declines. Global stocks dropped, with Japanese and Chinese equity averages tumbling into bear-market territory, and European investor confidence hit a three-year low.
"I think what's going on here is fear. Fear about an additional fall, and that is what's driving the prices down even if fundamentals may start to improve," said Tony David, managing director and ETF portfolio strategist at Guggenheim Investments in New York.
Further accelerating the sell-off, various sectors in the S&P 500 - from financials to transports to technology - also dipped below their 200-day moving averages, which technical analysts view as a harbinger of more selling.
"The 200-day average is a level that a lot of people look at to see if the market is on an up or down trend," said Joe Bell, senior equity analyst at Schaefer's Investment Research. "The uncertainty in Europe and weak fundamentals here and overseas, especially in the absence of corporate earnings, have been confirmed by falling below that technical level."
Market sectors are also showing technical weakness. The Financial Select Sector SPDR fund
The PHLX semiconductor index and the Dow Jones Transportation Average were also below their 200-day moving averages. The PHLX housing sector index and the PowerShares QQQ Trust
REBOUND IN THE CARDS?
Other technical indicators are also showing signs of weakness. The S&P's weekly moving average convergence-divergence, or MACD, an internal measure of performance which had been bullish since mid-January, turned bearish last week.
MACD essentially compares different moving averages against each other to determine the short-term trend in markets. The weekly MACD's "sell" signal, confirmed by weak readings in mid- and short-term momentum and relative strength, suggests a bleak summer ahead.
The more volatile daily MACD has for the most part been bearish since late March.
The market is clearly showing technical signs of stress, according to Richard Ross, Auerbach Grayson's global technical strategist based in New York, who cited the dip below the 200-day average as example.
However, he said, "the fact it comes at the tail end of a 10 percent correction is more likely to be a contrarian indication that the decline is over."
The relative strength index - a momentum indicator that attempts to determine when any financial instrument is overbought or oversold - shows the S&P 500 hovering at an oversold level, suggesting a rebound could be in the cards.
The market's risk aversion drove U.S. treasury bond yields to historic lows, which could make the possibility of a rebound in stocks more attractive to yield-hungry investors.
"Treasury bond yields are extremely low," Ross said, "which speaks to a band of risk aversion that has been stretched to its limits. It should snap back ... or snap."
Sentiment is similarly pessimistic, but it has reached a point that has in the past been associated with near-term rebounds. Rick Bensignor, chief market strategist at Merlin Securities, said market sentiment has declined to almost record levels in S&P futures.
Citing Jake Bernstein's Daily Sentiment Index, a popular gauge used by institutional investors, Bensignor said only about 5% of market participants were bullish, the third-lowest level ever.
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