Are Equities Oversold?

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

Are Equities Oversold

After an extended period of historically low volatility and steady gains in U.S. equity markets, the first significant pullback for U.S. equities since February 2016 has 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

11.08.2018

Will U.S. Equities Rally to Finish the Year?

U.S. equities experienced a sharp correction last month with broad market indices erasing virtually all their year-to-date returns. The October…

11.01.2018

Buying the Dip Takes a Hit

Historically, investors have attempted to capitalize from market drops by buying at the new lows in hopes that the stocks…

Market Anomaly or the Beginning of the End chart

10.26.2018

Market Anomaly or the Beginning of the End?

So far, October has been a forgettable month for equity performance. Internet and technology companies — once the darling of…

10.18.2018

Italy Looks to Increase Its Budget Deficit

The yield on Italian 10-year government bonds has risen this year as investor concern about the country’s fiscal policies mounts….

A Shining Light for China chart displaying MSCI A-shares

10.12.2018

A Shining Light for China?

On September 25, MSCI, Inc. — a leading global provider of research-based indices and analytics — announced its plans to…

Are Small-Cap Equity Opportunities Disappearing

10.04.2018

Are Small-Cap Equity Opportunities Disappearing?

In 1996, there were more than 8,000 companies listed on U.S. stock exchanges. Today, that figure is less than half….

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 >