S&P 500 Relative Strength Lowest Since 2001: Technical Analysis

A drop in a gauge of stock-market momentum to the weakest level since 2001 may not be sending the “buy” signal it normally does when it’s this low, according to technical analysts who study chart patterns to make forecasts.

The 14-day relative strength index for the Standard & Poor’s 500 Index dropped to 16.5 yesterday, the lowest level in almost 10 years, according to data compiled by Bloomberg. The RSI has been below 30 since Aug. 4, matching the three-day streak ended March 9, 2009, when the S&P 500 sank to a 12-year low and marked the bottom of the worst bear market since the Great Depression.

RSI identifies possible turning points by measuring the degree that gains and losses outpace each other. While readings of 30 or less typically are considered evidence that an index may rebound, the current streak suggests investors are reluctant to buy, making a sustained rally less likely, according to Craig Peskin, co-head of technical analysis at MF Global Holdings Ltd.

“The market just isn’t responding to the oversold condition,” Peskin said in a telephone interview in New York. “Just because things are oversold doesn’t guarantee there is going to be a bounce,” he said. “In a bull market, when you get a very quick oversold condition, the market often bounces. In a bear market, you sometimes get persistent oversold conditions and at this point we don’t know if this is the start of a bear market.”

Worst Since 2008

The S&P 500 slumped 11 percent in three days, the most since November 2008, as the reduction of the U.S. government’s credit rating added to concern the world’s biggest economy is headed for a recession. All of its stocks fell yesterday for the first time since Bloomberg began tracking the data in 1996.

The last time the RSI was lower, at 13.6 on Sept. 21, 2001, the S&P 500 was at a three-year low. The benchmark rebounded 21 percent to an almost five-month high on Jan. 4, 2002, before slumping 34 percent in the following nine months.

The S&P 500 surged 102 percent from March 2009 through the end of April this year and has since fallen 18 percent. While a bounce may be likely, it won’t be enough to drive the S&P 500 to new highs, according to Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research in Cincinnati.

“When you have these extremes, sometimes these can be a major warning sign,” Detrick said in a telephone interview. “When things are breaking down, it shows something is not right,” he said. “If you’re in a bull market, you don’t get this oversold. Something under the surface is severely broken.”

‘Life of Their Own’

The proportion of rising versus falling stocks on the New York Stock Exchange has shrunk to the lowest level since October 2008, according to data from Bespoke Investment Group LLC. The net percentage of stocks rising on the NYSE averaged minus 50.2 percent in the past 10 days, the fifth lowest reading since 1928, the data show. In the previous four occasions when the readings were worse, the S&P 500 rose an average of 6 percent in the next three months, according to the data.

“While these types of selloffs can take on a life of their own, the market is currently at oversold levels where at least a tradable rally was in the cards,” Paul Hickey, co-founder of Harrison, New York-based Bespoke, wrote in a note yesterday.

To contact the reporters on this story: Lu Wang in New York at lwang8@bloomberg.net; Victoria Stilwell in New York at vstilwell@bloomberg.net

To contact the editor responsible for this story: Michael P. Regan at mregan12@bloomberg.net

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