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Posted Thursday, June 18, 2015 12:00 am

Bruce A. Bittles

The equity markets encountered increased volatility last week but managed to finish the period with only fractional damage to the popular averages. The CBOE Volatility Index rose above 17 last week indicating investors were growing increasingly fearful. This was confirmed by the increased demand for put options on all exchanges. Rising geopolitical threats and concern over the lack of growth in the global economic community continue to weigh on stocks. Meanwhile the U.S. economy continues to outshine the world economies.

This is reflected in the powerful rally in the U.S. dollar. The dollar has rallied for 12-straight weeks surging to a four-year high last Friday. A strong dollar is a two-edged sword but the impact is seen as a net positive as it encourages foreign investors and benefits consumers with lower priced foreign goods.

A strong dollar is also deflationary, which could cause the Fed to postpone a shift in policy with regards to interest rates. Friday’s September Employment Report argued that the economy was gaining a measure of momentum. The drop in the unemployment rate to 5.9% means that the Fed will end the program of quantitative easing later this month. The Fed is unlikely to consider raising interest rates until the global economy shows a return to growth. As a result the path of least resistance is expected to remain to the upside.

The technical condition of the stock market suggests that performance in the equity markets will improve as we move deeper into October. Downside pressures from seasonal sources tend to melt away as the calendar moves closer to the mid-term elections. In addition, stocks are oversold and underbelieved, which should allow for another test of the highs in the fourth quarter.

Longer term the largest risk to the primary trend is the deteriorating performance by the broad market. Very near term, the combination of mounting bearish sentiment and improving seasonals is anticipated to neutralize the poor breadth of the market. The outlook for 2015, however, will greatly depend on the improved performance of the broad market in the final quarter of 2014.

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Article provided by Robert W. Baird & Co. with the authorization of its author for Evan Guido, Vice President, Financial Advisor at the Sarasota office of Robert W. Baird & Co., member SIPC. The opinions expressed are subject to change, are not a complete analysis of every material fact and the information is not guaranteed to be accurate.