PA ANALYSIS: Why equity markets are oversold

October has seen equities rally somewhat, indicating that investors believe markets are oversold – but is this really the case?

PA ANALYSIS: Why equity markets are oversold


After a 5% rally in the markets at the start of this month, the FTSE 100 is one major index to have suffered in recent days, blamed again on China and UK flagbearers Royal Mail and Rolls-Royce.

The UK market remains someway behind this year’s peak in April, the dizzy heights of 7,100, but for Jason Stather-Lodge, CEO of OCM Wealth Management, there are reasons to be optimistic.

For example, he points to often overlooked Relative Strength Index (RSI), which looks at momentum or the speed of daily price changes in indices.

A figure of 30 or below suggests an overselling and an opportunity to buy, while above 70 suggests markets are overbought and investors should therefore sell and lock in profits.

For Stather-Lodge, the index suggest markets rally back to a mid-point which will be more in line with the reality of where we are today.

“We have believed for some time that the declines have been greater than expected based on expected and average earnings over the last 10 years and this makes equities look relatively cheap on a historical basis,” he says.

After markets were disappointed by Fed inaction last month, Stather-Lodge points out that a weakened dollar will give optimism for earnings in companies that trade in the currency to increase and reverse some of the declines around those stocks.

He also points to signs of renewed resilience in the Chinese property market adding that, while economic growth may be slowing in the country, the total amount of global GDP that relates to China has remained very static.