Can Oversold Markets Get More Oversold?

By all accounts, this market could be called "oversold." Does this mean that markets can't get more oversold? To answer this, I think we should consider how the market got into an overbought situation during the previous bull market.

Record inflows of billions in cash from QE (quantitative easing) or buying of bond assets by the government, billions of dollars in stimulus, and record low interest rates have propped up markets and kept the party alive. Now, due to rapid inflation and concerns of a slowing economy, the Fed has removed the preverbal "punch bowl" and the party is over. The liquidity (cash) that once kept the market moving higher has been removed, interest rates are on the rise, and the Fed has begun to taper its bond-buying and no more stimulus checks. Couple that with rising inflation and a stagnating economy and we have a recipe for disaster in the stock market. Starting with the most speculative stocks (infinite P/E names with no earnings) and now even stock market staples like AAPL (Apple), GOOG (Google), FB (Facebook), and, TSLA (Tesla) have gotten beaten to a pulp. So does this mean that stocks can't go any lower? I don't think so and here is why. 

First, the retail investor who bought into the market late and bought up all these infinite P/E stocks have gotten hammered and all of that money is gone. They are on the sidelines licking their wounds with no money to buy "cheap". Second, the big funds have lost big too, so does this mean that they will just pile back into the market? What if they don't? Federal Reserve balance sheets (liquidity pool) in the US, China, Japan, and Europe which have swelled to nearly $31B is drying up. With no one left to buy, who will prop up the market now? While indicators may seem overly bearish right now and lots of people seem to be heading for the exits, it can get worse. 

So where does an investor or trader turn if he/she want to make money in this market? If you are an investor or a position trader (longer-term), then the best position for you is in cash. Keep your powder dry and wait for markets to bottom. However, if you are an intermediate-term swing trader and you have some experience shorting stocks, then there are plenty of opportunities to make some money on the short side in individual stocks and Index ETF. If you're new to shorting stocks, then you should consider only using a small amount of your investment capital and consider it tuition because shorting stocks is much harder than buying stocks.