Monday, May 31, 2010

Seems Like The Market Is Oversold

The S&P 500 Index return of -7.99% for May 2010 was the worst since May 1962. This poor May performance seems to be validating the mantra, "sell in May and go away." Just as selling in May 2009 was not the right investment approach, could selling now be equaling bad timing given the magnitude of the market's decline in May?

The sharp sell off has resulted in a number of technical indicators suggesting an oversold market. The percentage of S&P 500 stocks selling below their 50-day moving average is near levels achieved in early 2009.

Additionally, individual investor sentiment become significantly more bearish last week. The American Association of Individual Investors reported bullish sentiment declined over 11 percentage points to 29.83%. The bull/bear spread became more negative at -21%.

Lastly, S&P notes that with 99% of companies having reported first quarter earnings, the rolling four quarter reported earnings per share totals $60.93. As the below chart notes, earnings have crossed the value for the S&P 500 index. Could this be a form of the technician's golden cross? Earnings estimates for the S&P in 2010 total $64.84 and the 2011 estimate is $80.92. Company fundamentals do seem to be favorable.

If there is a concern, beyond those in Europe, it is deleveraging that is occurring at the moment. This deleveraging process is taking away some of the strength that would come from the consumer. With job growth weak, consumers are feeling stressed and with out a confident consumer, economic growth might continue, but on the weaker side.

1 comment :

Mariusz Skonieczny said...

Thanks for this post. I am much more comfortable buying stocks now than I was just a month ago. The fear is back in the market and I like the kind of deals that can be found.