Oversold can get more oversold even when it hits an extreme. Over the past few weeks, it has become very apparent there are only three catalysts that could lift stocks from the current rout: 1) if there is a Republican sweep in the mid-term elections; 2) the Fed adopts a more dovish “data driven” stance; and 3) there is a resolution to the Chinese trade situation. Since none of these appear imminent over coming days/ weeks, the bottoming process is going to feel awful – like it always does. While there are many real macro themes and geopolitical risks that could help explain the correction, we believe it came from excessive optimism, historically low volatility, and an extreme overbought condition. Just as these helped create an environment ripe for volatility in mid-September, now the opposite appears to be taking place. There is no question the technical condition of the market is broken, but that is almost always the case toward the tail end of the bottoming process and whoosh replay.
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