Are markets oversold?

Since the start of the week UK blue chips have lost almost 10% of their value, and across the pond US stocks lost 4-5% on Thursday alone.
On Monday the FTSE 100 opened at 5815 and by Friday lunchtime it was wallowing around 5261, after crashing through the 5300 mark in morning trading.
The catalyst for such a vast sell off was the culmination of weeks of uncertainty surrounding the debt conditions in the eurozone and the US.
A lack of decisive action from policymakers did little to help the situation, which meant that even after agreements were reached confidence didn't return.
But is all this hysteria truly warranted, or is it a classic case of the baby being thrown out with the bathwater?
David Buik, city commentator, said: "Markets are ridiculously oversold. The banking sector is under the cosh, but we have actually seen a slew of earnings that have been extremely good and positive.
"There's no question we have issues and falling growth, the news is not good. But the hysteria by analysts and the media is exacerbating the problem. Coupled with inadequate politicians and it makes an extremely toxic cocktail."
On Friday financial stocks were among those hit hardest by a pre-nonfarm payrolls sell off, with Barclays and Royal Bank of Scotland down over 6% and 8% respectively.
Both banks had issued interim results earlier in the week which showed the impact of both the payment protection insurance scandal and the Greek banking crisis on their balance sheets.
So as investors awaited the opening bell on Wall Street, comparisons with the 2008 financial crash were already being made.
A return to 2008?

But David Miller, partner at Cheviot Asset Management, said: "This is no re-run of 2008. This is the next stage of the credit bubble.
"While the headline numbers are alarming we should all take a deep breath and remember the fundamentals are much better than 2008; banks are stronger, companies are generally in good shape and traders are less heavily leveraged."

A look at the core tier one capital ratios of the banks that reported this week certainly shows they are in better shape than in the months before the crisis hit.
In its first half results Lloyds Banking Group's core tier one capital ratio was 10.2%, Standard Chartered's was 11.9%, Barclays' was 11%, HSBC's was 10.8% and RBS' was 11.1%.
Under the Basel II capital requirements put in place following the crisis, banks should have at least 6% of core tier one capital.
Mike McCudden, head of derivatives at Interactive Investor, said: "With the banks being caught up in the double whammy of PPI fines and eurozone exposure they have been taken to the slaughterhouse, but bargain hunters will be at the ready."
Long-term, analysts at Nomura and UBS think Lloyds is a buy, but are not bullish on RBS or Barclays over the same timescale. HSBC is seen by many as valued at a premium and although its global exposure helps diversify risk it also means there is a breeding ground for inefficiencies to develop.
Looking at other sectors, Buik cited the traditionally defensive plays of tobacco and utilities as a good bet and after its positive update yesterday, he also favours Unilever.
For stocks that will allow you to sleep at night he recommends Royal Dutch Shell, Centrica and BP, for their "cracking dividends".
Has the market bottomed out?

Louise Cooper, market analyst at BGC Partners, is hopeful for a recovery in the stockmarket: "A relief rally is completely normal after days of falls and at some stage expect one - in general, markets do not move either up or down in straight lines. However, a short, sharp (upwards) shock does not mean we are off to the races."
McCudden said the return of buying appetite could come sooner rather than later if the nonfarm payrolls are anything better than terrible.
He said traders are looking to the NFP for more bad news, but it is already priced in at the current levels. So if they surprise to the upside there will be a sharp bounce in equities regardless of the situation in the eurozone.
Specifically talking on the FTSE 100, he added: "We saw a brief test of the support level 5200, which held fast. Expect some resistance around 5340 and 5400 on the way back up."

This article was taken from our sister website, Interactive Investor.


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