Really, Really Oversold

The Price Momentum Oscillator (PMO) turned down on February 21, two days after the market's all-time high, and it moved steadily downward until Tuesday, when it finally turned up -- a short-term buy signal. The PMO has a normal range for market indexes of about +2.0 to -2.0, so when the S&P 500 PMO hit -7.66 on Monday, we have to wonder how that compares with previous PMO lows.

The PMO low in 2008 was slightly lower than Monday's reading, but you have to go back to the 1929 Crash and the Great Depression to see readings that are close to that or lower. With the current market so impressively oversold, does that mean that the bear market is over?

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To answer that question, let's zoom in a little bit closer and look at two previous times when the market was similarly oversold. The first was in 2002 when the 2000-2002 bear market was nearing a bottom, and the second was in 2008 when the 2007-2009 bear market was approaching its bottom. In both cases the final market low did not arrive with first and more extreme PMO low. Rather, the final market low was accompanied by a higher PMO low, a positive divergence. There are many other possible outcomes, but I think it could be that something similar is now in progress, and that a final market low is several months in the future.