Oversold Signal Flashing for First Time in 2017

S&P 500 Index stocks that are oversold outnumber those that are overbought

Mar 28, 2017 at 1:49 PM

It's been a rough, bumpier-than-usual road for the U.S. stock market lately. The S&P 500 Index (SPX) has given up more than 2% since touching a record peak of 2,400.98 on March 1, and last week suffered its biggest drop since the November presidential election. What's more, the SPX is on pace for its first negative month since October, down 0.5% so far in March. Against this backdrop, oversold S&P stocks recently outnumbered overbought stocks for the first time in 2017.

Identifying Oversold and Overbought Stocks

We define "oversold" stocks as those with a 14-day Relative Strength Index (RSI) below 30. On the flip side, "overbought" stocks are those with an RSI above 70. According to Schaeffer's Senior Quantitative Analyst Rocky White, the number of oversold stocks topped overbought stocks on March 21, with a "signal" encompassing 21 trading days (one month). Last week's signal was the first since late December, with just two others flashing in 2016 -- in early May and early September.

Overbought Oversold Stocks

Oversold Takes Overbought Signals

Stocks After Previous Oversold Signals

There have been 25 signals since 2010. Previously, when oversold stocks outnumber overbought, the SPX has gone on to outperform in the short term. The SPX's average return is higher than usual looking all the way to three months out, compared to the index's anytime returns since 2010. One week after a signal, the SPX has averaged a gain of 0.72% -- more than three times its anytime one-week return of 0.22%. Two weeks after a signal, the SPX has averaged a 0.91% gain, more than twice its average one-month return of 0.44%. The gap narrows looking one and three months out, though the SPX is higher than usual, on average, at both points.

SPX signals after oversold overbought

When Overbought Stocks Reign

Interestingly, when the number of overbought SPX stocks outnumbers the number of oversold stocks -- of which there have been six signals since 2010 -- the index's one- and three-month returns are even better. The SPX averages a one-week loss of 0.48% after one of these rare signals, and its two-week return is smaller than average, but the SPX has tacked on an average of 1.81% and 4.60% one and three months after a signal, respectively. What's more, the SPX was in the black 83% of the time one and three months after one of these signals.

SPX overbought oversold

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