Should Investors Be Worried About the VIX?

Within minutes of the opening yesterday, the Dow Jones Industrial Average was trading up triple digits to the highest level in almost six months. The strong opening was caused by an overnight drop in the U.S. dollar and hopes for another round of stimulus from the Fed at next week’s meeting. The drop in the dollar is viewed as resulting from a failure on the part of the G-20 to come up with a plan to stabilize the greenback. And even a 10% increase in existing home sales in September failed to halt a late-day round of profit-taking that almost took back the early gains. So many questions remain about bungled home foreclosures that a study of the situation won’t be released until next month, according to Fed Chairman Bernanke. The financial stocks were a drag on the market for most of the day and closed with a 0.4% loss. But Citigroup Inc. (NYSE: C ) rose 2.4% on an upgrade by Goldman Sachs Group Inc. (NYSE: GS ) to its “conviction buy” list. Goldman noted that Citigroup had a relatively small exposure to private-label mortgage-backed securities.  Office Depot, Inc. (NYSE: ODP ) was up 3.5% after an announcement of the resignation of its CEO and a possible “surprise” Q3 profit on Wednesday. Treasurys had been higher early in the day, but selling arose following the results of a $10 billion auction of 5-year TIPS that drew a negative yield of 0.55%. It is the first negative yield ever recorded for a Treasury offering. The Canadian dollar rose sharply against the greenback. The U.S. dollar closed at $1.0185 Canadian, up from $1.0278 on Friday. The euro traded at $1.3985, up from $1.394 on Friday. At the close, the Dow Jones Industrial Average was up 31 points to 11,164, the S&P 500 gained 3 points to close at 1,186, and the Nasdaq rose 11 points to 2,391. The NYSE traded just over 1 billion shares with advancers over decliners by 1.76-to-1. The Nasdaq had volume of 488 million shares and advancers there were ahead of decliners by 1.5-to-1. Crude Oil for December delivery rose 83 cents to $82.52 a barrel, and the Energy Select Sector SPDR (NYSE: XLE ) rose 16 cents to $59.46. December gold rose $13.80 to $1,338.90 an ounce on renewed currency and inflation worries. The PHLX Gold/Silver Sector Index (NASDAQ: XAU ) rose 2.8 points to 199.62. What the Markets Are Saying Even though stocks made headway yesterday, they did so as the result of a weaker dollar and expectations of further Fed actions designed to stimulate the economy. And just as the indices poked into the substantial overhead of sellers at the April “diamond” formation, prices backed off. So trading has become more technically oriented, meaning that stocks are overtly reacting to clear technical barriers. In addition to potential sellers residing in the diamond, an article in the Wall Street Journal expressed concern over the low levels of fear in the market, saying that “complacency could be setting in among investors.” The article points out that the Chicago Board Options Exchange Volatility Index (VIX) “has dropped to levels not seen since the spring. The index dropped below 20 yesterday for the first time since early May.” Actually, records indicate that the VIX traded as low as 17.9 on Oct. 31. The VIX hit a 52-week low of 15.23 in late April, just before the April 26 high. The article points out that “the S&P 500 then began a 16% slide through early July.” However, some would say that the VIX is not significant by itself in predicting downturns in the market, and I would agree. But together with our other very overbought indicators, the recent low volume, and the immediate response of sellers as the indices reach for new highs, I believe that another warning shot has been fired over the bow of the buyers. Until stocks close at least 3% higher than April’s highs, which would confirm a new breakout, it is prudent to remain cautious. For a gold stock that is about to break out, see the Trade of the Day . Today’s Trading Landscape Earnings to be reported before the opening include: Affiliated Managers, AGCO Corp., Airgas, AK Steel, Allegheny Technologies, Amedisys, American Ecology Corp., Ametek, Anixter, Applied Industrial Technologies, Arbitron, Arcelor Mittal, Asbury Automotive, Ashland, Autoliv, AVX Corp., Benchmark Electronics, Berry Petroleum, Biogen Idec, Bristol-Myers, Capella Education, Carlisle Companies, Carpenter Technology, Celanese, Centene, Ceradyne, Ceva, China Security and Surveillance, CIT Group, Coach, Cummins, Cynosure, Dorman Products, Duncan Energy, DuPont, EarthLink, Ecolab, Entegris, Enterprise Products, Fidelity National Information Services, FirstEnergy, FirstMerit Corp., Group 1 Auto, Hecla Mining, Hospira, II-VI, Imation, Jakks Pacific, Johnson Controls, KC Southern, Kimberly-Clark, Kinetic Concepts, L.B. Foster, LCA Vision, Lennox International, Lexmark, McGraw-Hill, Meredith, Mylan Labs, National Oilwell Varco, OptionsXpress, OSI Systems, PACCAR, Pentair, PrivateBancorp, Regions Financial, Rockwood Holdings, Royal Caribbean, Sherwin-Williams, Signature Bank, Sonic Automotive, Stratasys, TD Ameritrade, Techne, Tellabs, Tennant, U.S. Steel, Under Armour, Valero Energy, VASCO Data Security, Vitran, Waddell & Reed, Waters, Whitney Holding, Wisconsin Energy, World Acceptance and Wyndham Worldwide. Earnings to be reported after the close: Abaxis, Advanced Analogic Technologies, AFLAC, Airmedia, American Campus Communities, American Capital Agency, Arthur J. Gallagher, B&G Foods, Boston Properties, Broadcom, Buffalo Wild Wings, C.H. Robinson, Cabot, Calamos Asset, Callaway Golf, Canadian National Rail, CB Richard Ellis, CB&I, Century Aluminum, Compass Minerals International, Compellent Technologies, CSG Systems, CTS Corp., Delphi Financial, DeVry, Dreamworks Animation, DST Systems, eHealth, Encore Capital, EPIQ Systems, Equinix, F5 Networks, First Industrial Realty Trust, Fiserv, FormFactor, Gulfmark Offshore, IberiaBank, Illumina, Ixys, JDA Software, Jones Lang LaSalle, Kona Grill, Ladish, Life Technologies, Massey Energy, McKesson, Mercury Computer, Molex, Molina Healthcare, Nabors Industries, Nalco, NETGEAR, New Alliance Bancshares, Novellus, Oceaneering International, Panera Bread, PAR Technology, Parametric, Pioneer Natural Resources, PPD, Questar, RadiSys, RF Micro Device, Silicon Image, Standard Pacific, STMicroelectronics, Super Micro Computer, Supertex, Symmetricom, Taubman Centers, Teleflex, Trustmark, Ultimate Software, Walter Energy, Websense and Western Union. Economic reports due: ICSC-Goldman Sachs store sales, Redbook, S&P Case-Shiller Home Price Index, consumer confidence (the consensus expects 50), FHFA House Price Index, and State Street Investor Confidence Index. If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net .
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