Are Equities Oversold?

February 09, 2018 | Rob Britenbach, CIPM, Research Analyst, U.S. Equities

After an extended period of historically low volatility and steady gains in U.S. equity markets, the first significant pullbacks for U.S. equities since February 2016 have transpired over the last week. Through February 8th, the DJIA and S&P 500 each traded below their January 26th all-time closing highs by 10.4% and 9.7%, respectively. In 2017 the DJIA posted a record 71 new closing highs while the S&P 500 notched 62 new closing highs, its second highest in history. The upward trend continued into January 2018 with both DJIA and S&P continuing to record 11 and 14 additional new closing highs.

With the sharp return of volatility to a bull market that is already long in duration, investors are rightfully feeling a bit jittery right about now. The catalyst for the recent sell-off began with last week’s employment report showing faster than expected wage growth. This created concern that inflation could rise faster than expected. Under this scenario, the Fed would be forced to raise short-term rates at a quicker pace than what is currently being priced into the market. Only time will tell if this was simply a long overdue pullback as part of a normally functioning market, or the start of further price deterioration. While the bull market is long by historical standards and valuations are near the upper end of their historical ranges, economic and corporate fundamentals do not appear to signal warning signs. With such uncertainty, it can be helpful to look towards technical signals for clues.

This week’s chart looks at a popular technical indicator, the Relative Strength Index (RSI). This indicator measures the degree of recent gains and losses for a security or index over a specified period, typically 14 days, to identify overbought or oversold conditions. Its calculation captures both the speed and magnitude of price movements. RSI values range between 0 and 100, however RSI values of 70 or above are generally considered overbought and likely to experience a trend reversal. Likewise, RSI values of 30 or below are generally considered oversold and likely to experience a trend reversal to the upside. RSI values can remain in overbought or oversold territory for extended periods of time, so it is not until that value crosses these threshold levels again that a bottom or top is considered as being potentially formed. At the January 26th close, the DJIA’s RSI measured 88.7 and had been in overbought territory since late 2017. With the recent pullback, the DJIA’s RSI quickly dropped to 29.5 as of February 5th. The following three trading days produced large price swings, but ultimately these indices have continued to trade lower. Currently at 30.4, RSI for the DJIA is thus far holding above the oversold threshold. While a technically oversold level may foreshadow a future potential uptrend, investors should not place too much weight on any one indicator.

Print PDF

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Rob Britenbach, CIPM
Research Analyst, U.S. Equities

Get to Know Rob

Related Content

chart displaying Looming Maturity Wall for Emerging Markets Debt


Looming Maturity Wall for Emerging Markets Debt

This week’s chart looks at the looming maturity wall for emerging markets debt. The chart shows the amounts coming due…

Chart displaying market cap of the five largess S&P 500 stocks since the late 1990's


Tech Sector Bubble?

Our Chart of the Week examines the concentration in market cap over time among the five largest stocks in the…


Is it Value’s Turn?

This week we examine factor performance from the Russell 1000, with a focus on the dynamic between growth and value…

Puerto Rico General Obligation 2035 bond prices over time chart


The Impact of Puerto Rico on Hedge Funds

With the first half of 2018 behind us, our chart of the week touches on one of the more profitable…



Do Rising Rates Mean Lower Returns for EM Equities?

Rising rate environments are typically thought to put downward pressure on equity returns. Specifically for emerging market (“EM”) equities, the…


Goodbye Telecommunications Services Sector and Hello Communications Services Sector!

On November 15, 2017, S&P Dow Jones Indices, a leading provider of financial market indices, and MSCI Inc., a leading…

More articles

Subscribe to Research Email Alerts

Research Email Alert Subscription

Research alerts keep you updated on our latest research publications. Simply enter your contact information, choose the research alerts you would like to receive and click Subscribe. Alerts will be sent as research is published.

We respect your privacy. We will never share or sell your information.

Thank You

We appreciate your interest in Marquette Associates.

If you have questions or need further information, please contact us directly and we will respond to your inquiry within 24 hours.

Contact Us >