Market update for week of October 12th

Evan R. Guido Financial Advisor

The equity markets are rallying again this week on the heels of better-than-expected earnings and the magnet of new round numbers for both the Dow and S&P 500. Stocks are also benefiting from a surge in favorable economic news the past few weeks that has resulted in a rise in investor optimism.

Put/call ratios have plunged but only the 5-day equity put/call ratio is on a sell signal. The CBOE Volatility Index (VIX) is at the lowest level of the cycle this morning (22.43) but needs to fall below 22 to issue a sell. Investors Intelligence this morning showed a few less bulls and a few more bears but this survey is still on a sell signal.

The AAII data to be issued tomorrow could be important if we see a significant shift in attitudes but to date there has been no evidence of that. The sentiment numbers overall indicate optimism is present but not to the extreme often seen before important corrections.

The huge jump in stock prices the past two weeks has triggered an overbought condition and along with the low demand for puts suggests that this is not a great entry point. Stocks have had a strong run enjoying a wall of worry but with the news turning positive the upside is likely to become more difficult.

Dow 10,000 does not have a great deal of significance other than it might turn more investors bullish. The dollar is making a new 12-month low today. We are not too concerned about the dollar decline and feel it is bullish given that it will help support exports. Should the decline begin to accelerate and the yield on the benchmark 10-year Treasury take out this year's high just above 4.0% the dollar would become more problematic. There is also concern over valuations given the huge jump in Price/Earnings ratios this year.

It is very difficult to get an accurate perspective of valuations given the economy is just coming out of recession, but the fact that insiders are heavy sellers could suggest that P/Es are stretched.

Bottom Line: Not a great entry point (that occurred 6 months ago).