Stock Market More Signs of Strength Ahead of Q4

By: Donald_W_Dony

The CBOE Volatility Index is a very reliable gauge of risk on the S&P 500. Traders continually adjust their option positions according to market and economic conditions. This is reflected in the movement of the VIX. The best method of interpreting this index is through historic band ranges. Particular market conditions have a corresponding VIX reading. For example, during prolonged calm advancing markets (ie 2003 to 2007), the VIX registers about 18 or lower. As the equity markets decline or economic worries grip investors, the VIX displays levels in the 18 to 33 range (ie early 2008, part of 2009 and 2010). During brief periods of extreme concern (late 2008 and early 2009), the Volatility Index leaps to over 33.

The recent steady decline of the VIX from 42 to the present 18 illustrates the gradual fundamental and economic improvement of the US market. Traders are feeling more confident about the outlook for the 4th quarter and 2011. This positive data is in addition to other measures that suggest more optimism from investors.

Money is starting to flow back to growth oriented industry groups and out of defensive sectors. Consumer discretionaries, commodities and transportation have been the leaders in performance over the past two months whereas consumer staples and utilities have seen a withdrawal of capital.

Bottom line: Various key measures of market strength are showing a promising outlook for higher index numbers into Q4. The underpinning for a continued rise to year-end and early 2011 appears to be forming.

Investment approach: The rapid ascent in September and early October has thrown many securities in an overbought position. Models are indicating a probable short-term consolidation or shallow pullback by early November. This retracement might offer an opportunity to add new positions to portfolios.

Material-based industry groups are expected to remain the leaders in performance during this 4th quarter and into 2011. Commodity prices are being driven by a falling US dollar plus growing demand from developing economies. This trend is secular.

Investors may wish to continue overweighting their portfolios in natural resources and ETF indexes from emerging nations.

Your comments are always welcomed.

By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2010 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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