Following last week’s bloodletting on Wall Street, I was curious to know where the current panic selling stands compared to previous Wall Street panics. A popular tool to track the pulse of Wall Street is the RSI (Relative Strength Index) which is used to indicate technically overbought or oversold conditions.
Conventional wisdom states that an RSI value below 30 indicate an oversold condition and this is especially relevant for longer term timeframe such as a weekly chart. I used the weekly data for the NYSE Composite Index going back to early 1980s and used the RSI as an indicator. The resulting chart incorporating weekly data up till 10th October is displayed below (click on the chart for a larger image).
To my surprise last Friday’s close capped one of the worst oversold market in history as indicated by the above chart with the RSI hitting a low of 13. Wall Street’s pulse can now barely be detected as unprecedented market panic delivered a knock out blow which drove the RSI to a grossly oversold position.
So the question remains whether Wall Street will remain out for the count, or whether it will pick itself up and live to fight another day. If history repeats itself, and if the current situation is not so different from previous panics, then lessons of the past would have us expect a short term rebound as the market recovers from its current grossly oversold condition.
While it is safe to say that the stock market moves to its own rhythm which defies mortal man’s attempt to divine its future direction, it is also not unreasonable to assume that US equities are much closer to a significant market bottom after last week’s sell off.
As always, caveat emptor.