Short-term Outlook (1-5 Days):  Neutral (from 10/07 at 115.45)

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Equity Indicators - Updates and Extremes

VIX Implied Volatility

October has a reputation as one of the market's most volatile months.  Traders certainly associate the month with crashes, such as 1929, 1987, 1997, 1998 and 2008.

Seasonality-wise, October tends to wind up with fairly positive returns, however the S&P has lost at least -5% during October more times (26) than any other month of the calendar.

So it's pretty unusual to see traders so complacent at this point in the calendar.  I'm defining "complacent" here as traders not pricing in a big jump in volatility - on Friday, the VIX closed at its lowest level since April.

Let's go back to 1986 and look at the other times that the VIX closed at at least a one-month low during the first two trading weeks of October.  It was, indeed, rare - out of 240 "first 10 days of October", the VIX closed at such a low level on 23 days, less than 10% of the time.

The table below shows each instance, along with how the S&P 500 fared during the next two and three weeks.

Overall, the returns were consistently negative, with the S&P rallying over the next two weeks only 26% of the time.  The maximum loss during those periods averaged twice as much as the maximum gain.

Out of the 12 years where this occurred, there were really only three exceptions when the market rallied more than it declined (1993, 1996 and 2006), but even then the upside returns were weak and going through early November, the S&P really went nowhere.

Looking at the opposite situation, if the VIX had hit a one-month high during the first two weeks, then the results are quite different.  In those 43 cases, the next two weeks showed a return of +1.0% with 70% of them being positive.  The max gain (+2.6%) was larger than the max loss (-2.0%).

The same good performance goes for the next three weeks - then the return climbed to +1.7%, with 72% positive, a max gain of +3.7% and max loss of -2.0%.

The market most definitely bucked the seasonal trend of weakness during September.  Now we'll have to see if it can do the same to the traditionally volatile mid- to late-October period.

Nasdaq 100

Last week, we looked at the Nasdaq 100 index in terms of where traders were positioned in Rydex mutual funds and futures contracts.

I just wanted to update those two indicators below, because it remains the single most disturbing aspect of the current market.  It's especially notable due to potential technical resistance in the index right near these levels.

The latest updates of both indicators showed a very slight reduction in enthusiasm among the Rydex traders and a modest reduction in the net short position of commercial hedgers.

Both, however, remain near 8-year (at least) extremes and both argue for the improbability of a sustained rise in the NDX.

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