What Message is the Stock Market Sending Us?

The recent volatility has been so humoungous that it supersedes everything else.  This "shot across the bow" is a message, and as much as I would like to blame it on the computers that run the flash trading systems, my total respect for the stock market as the world's best barometer tells me to try to make some sense of all of this.  Looking at a wide range of indices, you can see that many have found some support almost perfectly at the top of that trading range from last year's panic consolidation.  Not only that, but maybe even more important, we now have a higher high, and a higher low pattern, which is still a bullish configuration.

We've overloaded you with all the bottom-spotting messages in the last few days, but let me repeat the message from the OEX Option Volatility Index (VXO).  On Monday, in our post titled "The End is Near!", we discussed the historical points at which the VXO passed through the "magical" 44 level and how that has a history of locating the neighborhoods of final bottoms of corrections.  You can see a chart of such recent actions below.

Click on chart above to view larger image.

Furthermore, this week we got another very strong confirmation that today's stock market is giving investors historically cheap stocks.  As of the decline on Wednesday, our excellent insider trading indicator that was introduced by Scott Gambill of Emergent Financial revealed that insiders are buying at a record rate - in the historical time frame since the data became accessible to us.  You can see this chart below.

Click on chart above to view larger image.

The chart above is not a short-term daily market timing device, but it is pretty obvious from these last 10 years that it pays to follow the very smart insider crowd.  Most intense buying periods produce huge gains in the fairly intermediate-term range.

Overall today, we still stand with our Asset Allocation Model providing us with the most bullish readings for Monetary (M1) and Valuation (V1), along with a next to most bullish reading for Psychology (P2).  We'll continue to play this one day at a time.

Click here to read today's complete Market Comment.

Don Hays

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