Hyper-Oversold Markets

Compelling and challenging analysis, but I can’t say that I agree with the idea that the S&P  is hyper oversold.  How can higher valuation be justified in an environment of stagflation and an economy starting the next leg down in the “greatest depression” to borrow a phrase from Doug Casey?  Oversold gold, silver and metals stocks…now there is something I can agree with!  JT

The recent sharp selloffs in stocks and commodities have fueled an incessant drumbeat of pessimism plaguing the financial markets. Greece is doomed, Europe is fracturing, China is slowing, the US faces a recession, the sky is falling! You’ve heard all the popular bearish arguments countless times. But as usual at major turning points, popular consensus is dead wrong. Oversold markets are very bullish!

As a battle-hardened contrarian forged by decades of trading, I relish oversold markets. They spawn some of the best entry prices ever seen, the ideal time to buy low (a necessary prerequisite to selling high later). The word “oversold” simply means a price has fallen too far too fast to be sustainable. It happens when traders’ collective fear grows excessive, flaring up brilliantly before rapidly burning itself out.

Both stocks and commodities are seriously oversold today, their prices battered down to silly levels. And as always when oversoldness runs rampant, traders think it is totally righteous. All the endless bearish arguments justifying the super-low prices seem valid and perfectly logical in real-time. But they are just rationalizations, scared traders desperately latching on to anything to justify their own irrational fears.

While the tyranny of the present obscures oversoldness when it is happening, in hindsight it is crystal-clear to all. You certainly remember the brutal stock panic of late 2008, when virtually everyone was utterly convinced the world was being engulfed by the second Great Depression. Everything was sold with reckless abandon, driving stocks and commodities to depths unimaginable a few months earlier.

But we, along with other contrarians and students of the markets, aggressively snatched up extreme bargains in the dark heart of that epic fear storm. Buying when everyone else wanted to sell led to enormous realized profits. So many times in 2009, traders asked me how we knew the markets were going to soar dramatically when everyone else was crazy-bearish. Simple, they were hyper-oversold!

Oversoldness returned in the summer of 2010, although nowhere near as extreme as seen during the stock panic. The stock markets had just plummeted in the infamous Flash Crash, Greece’s sovereign-debt problems led to overwhelming Europe pessimism, the euro was plunging, and weak Chinese stock markets threatened a hard landing in Asia. Global stock markets and commodities were utterly crushed.

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via Hyper-Oversold Markets – GoldSeek.com.

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