Nov 23, 2011

Should You Start Buying

It is clear that better buying falling stocks than skyrocketing, which is not to be mistaken with buying bad stocks. Opening position in oversold market is one of the keys for successful trading as you buy at discount. The fortune question is when is that time? Recent correction has uncovered numerous opportunities and still the markets are falling.

Closer look at market breadth indicators could give us perception about current market mood. To measure current market state we use numbers of stocks in S&P index above its 50 day moving average. Latest pullback of the index drove percentage of stocks above mentioned level to 38.7%, lowest since early October. The threshold indicating buying signal is 30%. That level is -1 standard deviation from its mean and is considered to be extreme level.  As indicated on chart numbers under 30% coincide with correction bottoms.

% of S&P 500 Stocks aAbove 50-day Moving Average

Quick view of the long trend indicator – S&P relative to its 200 day moving average suggest market is under the trend. Long term trend of the indicator itself is negative showing markets having bigger slumps under its 200 day MA.

S&P 500 Realtive to Its 200-day Moving Average

Fear gauge VIX is still leveraged now at 32. Readings above 30 indicate downturn and high volatility. Although market rallied and VIX touched 25 in late October current slump rises markets fear. In such conditions VIX levels above +1 standard deviation (31.58) is proven to be best time to load.

Volatility Index VIX

Definately market have been under pressure last month and prices now are attractive. Unfortunately things first go wrong before start going better and this is would be the case for next couple of days considering current negative market sentiment. However this is the time to be cautious in order to catch the following sweet rally.

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