Stocks are oversold – so what? What does that even mean?
We can sit here for days, weeks, and months, arguing about what overbought and oversold means. But the truth is that there are a million ways to interpret this. More importantly the analysis must be done within the context of current market conditions, so clearly it is very subjective.
Pragmatic Capitalism put up a post earlier today with their interpretation. This chart takes the percentage of S&P500 stocks that are above their 200 day, 50 day, and 20 day Exponential Moving Averages. This overbought/oversold indicator uses the EMA as opposed to the SMA (Simple Moving Average) so that more weight is given to the more recent data.
The important thing that they note here is that these oversold conditions, especially when they all happen simultaneously, still need to be taken within the context of bull or bear markets. In Bull markets or sideways markets, these become buying opportunities, while in bear markets they can lead to a bounce before further declines. The article considers this oversold condition in particular within a Bear Market.
Go read the post in full at PragmaticCapitalism