US Stock Market Is Oversold and a Near-Term Rally Is in the Offing

investing.com:

Is a stock market rally coming? I think that is most likely the case. However, to understand why, we must review what we said at the beginning of July:

With bullish optimism quickly returning to the market, the pressure to chase performance from the “Fear Of Missing Out” will continue to provide a “bid” under stocks. However, such does not remove the potential for a 5-10% correction. Such corrections are normal within any given year and will provide the best entry point to increase equity exposure near term.”

The chart below shows the S&P 500's frequency of declines in each year from 1950 through the end of 2022. 

Source: @TheMarketEar

Since the beginning of August, the stock market has come under pressure. Concerns about higher interest rates, a downgrade of U.S. bonds, and an uptick in inflation spooked more bullish investors. The market has declined by roughly 5% from the recent peak through the end of last week.

Notably, the correction was orderly, with no signs of financial stress. The following chart shows that volatility did rise somewhat as the stock market declined. However, during periods of stress, the volatility index tends to spike higher.

You can see the difference between the current decline and March during the regional bank failures.

After two weeks of consistent selling pressure, the previous overbought and more exuberant sentiment levels have reversed. During more bullish market trends, technical indicators tend to bottom at more shallow levels. The chart below shows the Moving Average Convergence Divergence indicator (MACD), which measures the spread between two moving averages.

Crosses of the two lines denote buy or sell signals for the stock market. Furthermore, the Relative Strength Index (RSI)