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Low RSI of Wilshire 5000 Says It's Time to Buy, Then Sell

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On August 8, 2011, the 21-day RSI of the Wilshire 5000 Composite Index closed at 22.27. This is the eighth-lowest daily reading since January 1985.

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On August 8, 2011, the 21-day RSI of the Wilshire 5000 Composite Index closed at 22.27. This is the eighth-lowest daily reading since January 1985 (when the stockcharts.com data starts). This is the 0.10% percentile. The seven lowest daily readings were in four groups. This article will not only review the four lowest RSI groups, but also the next five closest groups when the RSI was a bit higher than August 8 but was still very low.

Here are the four groups since 1985 when the RSI was lower than August 8, 2011 and what happened next:

October 19-20, 1987

The RSI hit its low on October 19 and the Wilshire bounced 10% over the next two days. Those gains proved to be ephemeral as the market retested the crash's low and ended up 5.2% below the Oct 19, 1987, signal close on December 4, 1987. However, that proved to be the end of the bear market and the start of a bull market. The upside from the close of the Oct 19, 1987, over the next 2.74 years was 52.28% for a 16.58% annualized return.

September 19-21, 2001

The September 21, 2001, RSI low was the exact day of a major low. The Wilshire went up 23.4% over the next half year. However, it was just a bear market rally. Eventually the market would bottom on October 10, 2002, a full 18.2% below the September 21, 2001, close. But the RSI initially did a very nice job of urging traders to ignore the prevailing sentiment and buy stocks for a rally. If you would have bought on the signal date and held throughout the entire bear, you still would have made over 10% annualized over the next six years despite a shaky 2002.

August 23, 1990
The Wilshire rallied 5.3% over the next 13 days. That was it for the rally as it retested the low and ended up 4.7% below it on October 11, 1990. This was the end of the brief 1990 bear market and the start of a great long bull market which produced an 18.46% annualized return over the next 7.9 years from the signal date.

July 23, 2002
The Wilshire bottomed the next day on an intraday basis. From the July 23, 2002, close to the August 22, 2002, intraday high the Wilshire went up 19.6%. Once again the Wilshire retested the low and bottomed on October 10, 2002, 4.3% below the July 23, 2002, close. If you could have bought at the signal date and held, you would have made a 15.23% annualized return over the next 5.2 years.

This is where the present reading would fit on the list:

August 8, 2011
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Here are the other times when the RSI got to very low levels, but not quite as low as we were on August 8, 2011:

April 4, 1994

This is the first of two examples in our study which wasn't in a bear market. The signal was unique in that it was the only signal given in the first half of the year. The Wilshire went up 4.3% to June 16, 1994 before hitting some minor turbulence. While the ultimate low was June 24, 1994, it was only 0.21% below the April 4, 1994, close. The bull still had another 153% to go or 24.21% annualized over 4.28 years.

October 10, 2008
This is where things start to get tricky. The market went up 15.6% over the next four days and that was it for the rally. Then the market went down another 25.7% below the signal date close. Interestingly enough, if you would have bought at the signal and held you until May 2, 2011, you still would have made 19.87% annualized.

October 12, 2000

Note a third of the signals were during October 10-19. The Wilshire did its usual rally and went up 9% over the next 25 days. It then proceeded to get annihilated over the next two years. From the signal date to the October 2002 low, the Wilshire went down a whopping 41.1%. Like the previous example, this wasn't the greatest reward/risk ratio but it did correctly call for a decent and tradable bear market rally. This is the best case scenario for the bears. What is interesting is if you bought and held throughout the entire ensuing two-year collapse, over the next seven years you still would have made 3.71% a year which was over 1% better than inflation.

July 16, 1996
This was the other signal that did not involve a bear market. The Wilshire only went up 3% in two days before it started its obligatory failed test of the low. Similar to the 1994 instance, the Wilshire went 0.44% below the signal date close before resuming the great 1990s bull market. The bull market still had two years and 81% left in it which equates to 34.59% annualized from the signal date.

Aug 31, 1998

This was the low before a respectable 11.1% bear market rally which lasted 23 days. You guessed it: The market retested its August 31, 1998, low and failed. The bottom was on October 8, 1998, and 1.8% below the August 31, 1998, low. If you would have bought on the signal date close and held until March 24, 2000, you would have made 40.72% annualized.

Observations

In the four prior instances the Wilshire's RSI went lower than August 8, 2011, the market rallied 10%, 23%, 5% and 19% from the RSI low date close to the ensuing high.

In all nine prior instances listed above the rally ultimately failed and the market went on to new lows.

If you would have bought the market at the close of the nine signal dates and held until the peak of the ensuing bull market, you would have enjoyed 16%, 10%, 18%, 15%, 24%, 19%, 3%, 34% and 40% annualized returns.

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