Is The Market Oversold?
Posted by Larry Doyle on February 25, 2009 2:40 PM |
The valuation of any asset is determined by three factors:
1. Fundamentals: measures items such as cash flow analysis, cost-benefit analysis, earnings before interest, taxes and depreciation (EBITDA)
2. Technicals: measured by regression of price movements to determine overbought and oversold conditions
3. Psychology: measured by unscientific surveys of market participants
I have never seen such divergent views on expected future earnings which directly impacts any reasonable fundamental analysis.
Differing technical analysis has the market in the slightly oversold category but not dangerously oversold.
Psychology remains remarkably balanced.
Add it all up and we have markets that are not so bearish and so oversold that they have no potential to go even lower. If markets were tremendsously bearish and oversold, then market participants would have sold out long positions and increased short positions thus cushioning the market from further selloffs. These developments have not occurred, although certain market mavens and asset managers would have you believe the market is oversold.
On the psychology front, I think it is beneficial to review an unscientific survey managed by Laszlo Birinyi. This survey comes out weekly and measures respondents’ bullish, bearish, and neutral outlooks. The bullish measures have moved down only marginally, bearish sentiments have moved up only marginally, and neutral sentiments have been fairly stable.
This unscientific survey is targeted at active market participants. Based on my experience, a lot of these surveys run together. Unless and until I see measures of bullishness approach the 25-30% area will I believe the market is dangerously oversold. That sort of move would be consistent with a market that is approaching capitulation.
Any questions? Don’t hesitate to ask!!