Trader Talk

Pisani: Another sign we are way oversold

Trader on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters

Once again, the markets have opened up strongly. We'll see if they close that way. In the last four trading sessions:

1) A lot of stock has been sold

2) A lot of protection has been bought

3) Sentiment indicators are at historic extremes

I struggle to describe how far some of these indicators have gone, but by any measure—option put/call ratios, movement in the VIX, or Relative Strength Indicators (RSI)—we are at extreme levels.

Another indicator to look at is the 50-day moving average for the S&P 500, one of the most-watched technical indicators.

According to our partners at Kensho, the S&P 500 is 4.35 Standard Deviations from its 50 day moving average.

It's hard to describe how rare that is.

To give you an idea of how far out we are, one standard deviation means that an event would occur outside the range 1 in 3 times.

Two standard deviations one in 22 times.

Three standard deviations one in 370.

Four standard deviations 1 in 15, 787.

4.5 standard deviations one in 147,160 times

That's where we are, between 4 and 4.5 standard deviations. What has happened here statistically happens somewhere between one in 15,787 and 147,160 times.

Meaning, like, almost never.

Kensho's data only goes back to 1980. There has been one time this has happened: August 8th and 9th, 2011, which is when Standard & Poor's downgraded U.S. sovereign debt.

In the following week later there was a notable snapback:

S&P 500: up 7.5%

Russell 2000: up 10.4%

Energy: up 10.4%

Materials up 9.9%

That's a good sign, which makes complete sense.

Of course, this is only one datapoint, one event. Which highlights what strange times we are living in.