A Big Shot Across the Bow, But the Ship is Still Afloat!

Late yesterday, we published a post discussing the long-term record of the OEX Option Volatility Index (VXO).  It closed around 50 yesterday, and we discussed it's historical record of calling the end of serious, scary corrections or even bear markets.

We also told you that the VXO is not perfect (it has been right 6 out of 7 times), and that the very real threat of a coming Depression did create intense selling in its wake.  But in all cases when it was just normal unadulterated panic, and not a threat of an upcoming "apocalypse," the signal was fool-proof.  So today, we have to ask ourselves, "Is the US Economy being threatened with a coming apocalypse as it was in September 2008?"

It's possible, I guess.  But this market crash is nothing more than a "shot across the bow."  I said "across" the bow.  It didn't hit the ship, but it was close, and if the ship doesn't start sailing on course, the next shot could be more serious.  So today, we have our Psychology Composite back at a rating of P2, as you can see in our Asset Allocation Model below, which is a very good sign.

And yes, our Monetary Composite is still at its most bullish level of M1.  You can't dismiss this, since its record is so phenomenal.  That is saying...the economic recovery is on track, even as slow as it is with the housing over-hang.  Monetary is saying to continue to expect higher corporate earnings.  And Valuation...it's also still at is most bullish level of V1, which we've mentioned several times before as being very positive.

The economy?  I don't think anything shows this better than the trend of Unemployment Insurance Claims.  That trend suffered in April, May and June due to terrible weather, but more seriously, due to the Japanese economy temporarily hitting that brick wall as the earthquake and nuclear meltdown closed their electrical supply and industrial plants.  You don't STOP a major source of parts/equipment of a major economy without impacting the world's economy.  So naturally, the Unemployment Insurance Claims took a sabbatical.  But it does look like the new trend is getting back in gear, and soon you will see that magical number drop under 400,000.

We wish we didn't love the stock market so much.  It is obviously tough on our nerves, and my hairline.  It never gets easier.  It tries its best to wreck your life, and it will shake your tree as you sit up there holding on with all your strength.  That is the bad news, and in times like yesterday, you just wonder why/how you can endure it.  But you do, and based on 42 years of being occasionally bruised and battered, I know that there will be a tomorrow when the sun is shining, the bruises are healed, and the birds are singing.

Don Hays

Please see important disclosures at the bottom of this page.