Sunday, August 5, 2012

Olson Global: CBOE Volatility Index (VIX) Approaching Long-Term Support

As I identified some time ago, dividend stocks will become increasingly more important. Aivars Lode

With July’s employment data posting largely mixed, but
better-than-expected results, the S&P 500 Index scored a nearly 26pt
gain on Friday to end the week at 1,390.99. That was its higher
reading since May 4 having jumped nearly 125pts since the beginning of
June. Moreover, the CBOE Volatility Index (VIX) of the S&P 500 fell
further last week and is now apparently taking aim at a retest of
long-term trend line support currently sitting at the 13.50 level.
Although day-to-day price swings continues to dominate, the general
trend of the S&P 500 Index remains positive. That being said,
prolonged uncertainty over the European debt crisis, the outcome of
this year’s presidential election and the inability of Congress to
address the “fiscal cliff” issue until (realistically) after the
November elections have passed has hastened a shift away from “risk”
assets in preference of cash, cash equivalents or intermediate-term
fixed income instruments by a number of investors. That same
uncertainty has resulted in a shift toward dividend paying stocks
within equity portfolios. As a consequence, retirees, pension funds
and yield seekers who are in need of an income stream have been forced
to accept lower rates of return on bonds and lower dividend yields on
stocks. In turn, that has resulted in higher prices being paid for
those assets. A byproduct of this shift has been the continuation of
impressive gains registered in bond prices and dividend paying stocks
at the expense of a number of growth stocks that have recently
suffered unexpected setbacks. In addition, the desire to preserve
capital by another set of investors has produced the phenomenon of
“negative interest rates” currently being offered on a number of
European sovereign debt issues. 
Interestingly, this unusual investment setup has created an
environment in which a bit of good news can trigger a sizeable daily
gain in equity prices, followed by a return to a string of modest
day-to-day retreats highlighted by a series of glum macro economic
forecasts. Since the VIX is often referred to as the “fear index”, and
given the inverse relationship it has with the direction of the S&P
500 index, higher equity prices accompanied by a decline in the VIX
could play out for the remainder of the summer. But as the November
elections approach, or if the European finance ministers find that an
intensified crisis of confidence begins to grow before then, a move
toward the 13.50 area on the VIX might prove to be a very attractive
Jim Donnelly, Olson Global Markets

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