In this Stock Market Environment, What is our Bottom Line?

It is hard not to be depressed about the world situation...and that includes the US if you listen to or read the prevailing news and estimates of the future.  We've just, once again, had outstanding quarterly earnings reported, and if you remember, it was only a few weeks ago that the estimates were being revised down fairly sharply.  Now...guess what?  The 4th quarter estimates are being revised down.  Such has been our life for a while now - a long while.

As we've mentioned before, we carefully watch the OEX Option Volatility Index (VXO), and when this indicator passes through the "magical" level of 44, it is typically a sign that fear has reached its height.  Over the past few years, this indicator has risen above 44 on three different occaisions: 1) in 2008's bottoming formation, 2) in 2010's correction, and 3) in August of this year.  If you remember our explanation of the "magic" of this signal, it suggests that the first penetration of the 44 level by the VXO is typically the signal that the emotional dam has been broken and has unleashed the peak fear on that day.  Quite often in the following weeks and/or months, you may see the stock market indices make a lower low in the aftermath of the intense fear; however, you typically don't see the VXO make a higher high. 

So with the environment of today, here's the message that our Asset Allocation Model is sending us.

You can see that after last week's close, our Psychology Composite moved down one level to P3.  However, P3 is still a positive rating within the green zone.  Furthermore, we're still receiving the strongest readings from both our Valuation and Monetary Composites.  And lastly, our fail safe, the Hays Market Trend Analyzer, remains in its Investment Phase, as it has yet to trigger during this correction that we've experienced.

So today, with our Asset Allocation Model remaining in a very positive formation, this is our bottom line!

Don Hays

If you missed my interviews with Yahoo! Finance's Breakout blog yesterday, be sure to check them out here.

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