Tuesday
Jun012010
S&P 500 Back to Extreme Oversold Levels
Tuesday, June 1, 2010 at 04:53PM Another day, another sell-off into the close. In what is beginning to be a frequent (and depressing) pattern, the S&P 500 sold off into the close and finished down over 1.7% today. With the decline, the S&P 500 is back to 'extreme' oversold levels, which we define as more than two standard deviations below the 50-day moving average. If it isn't Greece and Europe, its FinReg, and if it isn't FinReg, it's the gushing oil in the Gulf. Oh, and don't forget about the growing tensions in Korea and now the Middle East. At least it's not Monday.
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Reader Comments (8)
I've seen this before in your postings, but exactly what is news/strategy/ideas in these reports? We can all crank out a stochastics chart on the SPX. Do you guys have insights or not?
Using standad deviations as a measurement in the markets can be tricky. Two or three St. Dev in mediocristant statistics ( like measuring weight, height IQ scores etc. ) is more reliable because the extreme values are not that far from the mean. In other words the mean IQ might be around 100 and at three standard deviations it may be 130 or so, but you wont find someone in the sample that has an IQ of 500.
On the hand if you are measuring income or the markets for example it is routine to see a sample that is five times the mean. If the mean household income is 50,000 lets say its easy to find people that have 250,000, even 2,500,000 which is 50x the mean.
So be careful using this type of measurement in the markets. It will work OK in normal perods but those "outlier" situations can kill you.
The October 1987 massacre for example was twenty three standard deviations below the mean (a drop of 22% in one day). If you’re not aware that something like this can happen, you’re likely to have a heart attack some day. The research proves that outliers have an enormous impact on long term performance and a few days here and there can mean everything.
Oh God!
I really wish you're right. I need some boost to my portfolio. Still lagging behind.
Thanks for giving me some hope.
Jose
Stock prices are not normally distributed. Standard statistics do not work. Standard deviation is meaningless (thanks, Charles Maley), as are beta, alpha and the efficient portfolio. These are academic constructs based on the assumption that stock prices are normally distributed. In the real world, two Nobel Prize winners tried to pretend their academic work translated to the real world, and started Long Term Capital Management. 'Nuff said.
I think there is some confusion regarding the relevant distribution of market data. While empirical evidence suggests that price returns are not normally distributed, the data upon which this analysis is based may or may not be normally distributed. We simply don't know until someone takes the time to publish it. Bear in mind that what we are looking at is the average spread from the 50 day moving average. Given that we're dealing with two averages here, my guess is that the data is likely to be far more normally distributed than the other commentors realize. Regardless, I'd certainly be interested in seeing a proper analysis of the distribution of the spread from the 50 day moving average to know for sure.
On monday the next ship of terorist will try to go to Gaza, so more bad news from the Middel east for the market
Ask mr Bollinger with RSI in tow will apply all that is needed. Buy when RSI is at severely dpressed levels but only after the 2 std dev to the 50 MA has been breached and then come back through.... It works very very well. Also explains all the flak...cant buy on 2 std dev moves UNLESS the data supports a recovery to "normal" patterns. This also helps short momentum but its a VERY shory term indicator. When ANY violation occors ( BBand breached again for example.)..u must stop out immediately.
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