Oversold into October

Posted by Adam Turnquist, CMT, VP Chief Technical Strategist

Friday, September 29, 2023

Key Takeaways:

  • The drop in U.S. equity markets this month created technical damage and oversold conditions. Despite the widespread selling pressure, the S&P 500 managed to hold up above its rising 200-day moving average (dma).
  • Oversold conditions of this magnitude are rare during an uptrend and historically point to a buying opportunity based on positive forward returns during commensurate periods.
  • So long September—seasonality trends improve into year-end. The fourth quarter is historically the best quarter for the S&P 500, with average gains of around 4.2%.

It may be an understatement to say it has been a rough month for stocks. Barring a 0.5% or better advance today, the S&P 500 will post a fourth straight weekly decline, marking its longest weekly losing streak since December 2022. Volatility has also resurfaced right on cue, with the CBOE Volatility Index climbing by as much as 40% intra-month before pulling back over the last few sessions. However, in terms of performance, nothing really qualifies as out of the ordinary. Since 1950, the S&P 500 has historically declined in September 55% of the time, posting an average loss of around 3.8%. The VIX historically peaks on the year around week 40, suggesting next week could be a top for implied volatility.

While this month has caused a growing list of technical damage, the seasonality setup improves into year-end. As we highlighted on our blog yesterday (October Stock Market Seasonals: Trick or Treat?), October and November have been historically one of the best two-month periods for the S&P 500. The fourth quarter is also historically the best quarter for the S&P 500, with average gains of around 4.2%.

Oversold Conditions Spreading

Stocks reached oversold levels this week. As shown below, the S&P 500 dropped back to support at 4,300 after falling over 4% this month. A break below this level leaves 4,275 (September low) and 4,200 as the next major areas of downside support. The latter support level traces back to prior highs and lows, the rising 200-day moving average, and is near a key Fibonacci retracement level (4,181).

The sharp drop this month created oversold conditions. The Relative Strength Index—a momentum oscillator used to measure the speed and magnitude of price action—slid to 30.3 on Tuesday, marking its lowest reading in 12 months. Furthermore, oversold conditions within the index have become widespread. Earlier this week, over 20% of S&P 500 stocks reached oversold levels based on RSI readings below 30. At the sector level, defensive sectors such as utilities, real estate, and consumer staples were the most oversold, suggesting (along with sector breadth and relative performance) that there has been no major discernable shift from offensive to defensive sector positioning.

S&P 500 Technical Setup

View enlarged chart

Given the degree of selling pressure across the S&P 500 this month and the fact the index is still holding up above its 200-dma, we screened for historical comparisons of widespread oversold conditions within an uptrend. Specifically, we filtered for periods when: 1) The S&P 500 was above its 200-dma and 2) when the percentage of constituents with an RSI reading below 30 crossed above the 20% threshold. Since 1990, we found 14 other unique occurrences after filtering out signals occurring less than two weeks apart.

View enlarged chart 

While the dataset is limited, it suggests that selling pressure of this magnitude when the S&P 500 is above its 200-dma is rare and historically a buying opportunity based on positive forward returns over the next 12 months. The market was up by an average of 7.6% six months later, with 12 of the 14 occurrences producing positive results.


September has lived up to its reputation as being a weak seasonal period for stocks. The S&P 500 is coming into month end with a loss of over 4% and a decent amount of technical damage. Despite the widespread selling pressure, the index has managed to hold up above its rising 200-dma. The degree of oversold conditions reached this week is rare during an uptrend and historically points to a buying opportunity based on positive forward returns during commensurate periods. The market is also oversold and entering a strong seasonal period, as the fourth quarter has historically been the best quarter for the S&P 500.


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