The recent sell off in the market has brought the S&P 500 down 7%, and put the market in an extreme oversold position from a technical perspective. For investors who don't subscribe to the double dip theory on the financial system, this may be an opportunity to get into names that might benefit from the continuing economic recovery. (Find out how you can combine the best of both strategies to better understand the markets. For further reading, see Blending Technical And Fundamental Analysis.)
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The S&P 500 is now selling three standard deviations below its 50-day moving average. The worst performing sectors during the corrections are the usual volatile suspects - basic materials, energy, technology and financials. Basic materials is off the most, down 14%, while the rest are off 10%.
A Worldwide Glance
The proximate cause of the precipitous sell-off was market worries about sovereign debt risk in Greece in particular, and Europe in general. An examination of the Credit Default Swap (CDS) market shows a large spike in the cost of protection from defaults for various countries.
Portugal and France have seen the largest percentage increase in the cost of insurance against default since the start of 2010, but remain well below Iceland and Greece. Other countries the market believes have a high degree of sovereign default risk as measured by the CDS market are Argentina, Venezuela and Dubai. Interestingly, the market believes the U.S. is still the least likely to default on its sovereign debt despite the well-publicized budget deficits.
American International Group (NYSE:AIG) is 24% below its 50-day moving average, the most of any stock in the S&P 500. American International Group is a hard stock to analyze as its operations lack transparency and its huge debt to the government seems almost insurmountable. Approach this name with care as the company is a political whipping boy and the darling of day traders.
Ryder System (NYSE:R) not only got caught up in the market sell-off, but also reported earnings for the fourth quarter of 2009 that missed analyst's estimates. The company also reduced its outlook for earnings per share in 2010 to a range of $1.80-$1.95, below the consensus of $2.11. This stock is 20% below its 50-day moving average.
U.S. Steel (NYSE:X) is 17% below its 50-day moving average. The company, and the rest of the steel industry, is still suffering from the slow return of demand as the economy emerges from the recession. U.S. Steel also reported a loss in the fourth quarter of 2009 and missed analyst guidance on earnings and revenue.
Poor earnings and outlook were the story for Motorola (NYSE:MOT) as well, which is 18% below its 50-day moving average. The company gave an outlook for 2010 sales of cell phones that fell below what investors expected.
The shares of money manager Invesco Ltd. (NYSE:IVZ) seems to have hit a glass ceiling at around $24 per share, as it has hit that level multiple times over the last five months and failed to break out. Fourth-quarter earnings were the final straw for investors as the company reported earnings that were triple last year's fourth quarter, but committed the cardinal sin of missed expectations. Invesco Ltd. is 17.5% below its 50-day moving average.
The Bottom Line
Technically, the market is reaching extreme oversold levels although as recent history has proven, it doesn't mean the market can't go down further. Smart investors should choose wisely from the newly uncovered stock bargains. (To learn more about technical analysis techniques, read The Rectangle Formation.)
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