How Oversold Will We Get?

11/19/2012 7:00 am EST


Jim Jubak

Founder and Editor,

According to MoneyShow's Jim Jubak, the market is getting oversold. Some stocks now look attractive, and he wonders how much lower we will go before the market is ready to bounce.

For the week ahead, watch how oversold this market gets before we get a bounce.

Now, we are oversold, especially the Nasdaq. The S&P has just moved into oversold territory. When they hit their 200-day moving average or break below it, you’re looking at a stock like Apple (AAPL)—which is down 20% or so—and you say, OK, these are starting to look attractive.

But, we’re worried about the fiscal cliff. Every day, we hear more stories about what happens if Congress and the President don’t agree, and we end the Bush tax cuts and we put in all these automatic budget cuts and we send the US into recession. So, if you’re looking here, you’re going, "Well, gee, I know stocks are down, but I’m still worried about this."

The other thing has been end of the year tax selling. Now, end of the year tax selling usually is people selling their losers to try to realize those losses, so they can put them against any profits they have. This year, there has been an added element, which is that everybody is afraid that the rates—especially the capital-gains rates—are going to go up in 2013. So people have been selling in 2012 to lock in the lower rates.

Investment decisions made on the basis of guesses about tax policy are always in my mind kind of questionable, but a lot of people believe they can sell here and then get back in a lower price. If you sold Apple at $630 and it’s at $550 and you buy back in, that does indeed look like a good trade.

The nice thing about selling with a profit is that you don’t run into any of the SEC rules on wash sales. You can buy back a stock that you sold with profit immediately. You don’t have to wait for 30 days as you do when you take a loss. So, that’s hanging over it too.

That looks like it’s getting to the point of exhaustion. I mean, how much more do you expect the stuff...I mean, if you’re looking at a profit that’s kind of disappeared, yyou know my motivation for selling isn’t really that great.

So, we’re oversold. We’ve still got some fear hanging over us. But stocks are starting to look attractive, particularly individual stocks, so you might want to keep an eye on the 200-day moving average, and whether we start to see some rallies.

Apple is a really, really good indicator. If Apple starts to move—not necessarily hugely, but steadily—I think you can be sure that we’re starting to see a turn from selling to maybe people thinking there are bargains in buying. So, that’s what I would look for in the week ahead.

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