The short-lived selloffs in the major stock market indexes earlier this year proved to be springboards for short-term rebounds to record high levels. The deeper the decline and the more reactive the CBOE Volatility Index (VIX) becomes, the more sensational the recoveries.
October's decline was dramatic. The intense selling last month reached near panic levels and was beyond the varying shades of fear witnessed in the prior two corrections. This was depicted in the VIX's meteoric ascent to 31 from 15 at the height of selling on Oct. 15. The selling rout in mid-October resulted in a slingshot rebound that catapulted the stock market toward all-time record highs by Halloween.
October delivered on two historical points for which the month is renowned: a dramatic selloff and a pivotal rebound. The decline may have satisfactorily addressed the question of when a 10% correction might unfold. Although the major indexes held short of surrendering a full 10%, the underlying market sustained considerably greater losses with deeper retreats among stocks representing such leading sectors as biotechnology, consumer discretionary, energy, industrials and technology.
The retreat effectively removed a haunting uncertainty for investors pertaining to the timing of a deeper slide. Peering into the rearview mirror midway into November, other concerns have subsided as well.
The fear of an Ebola pandemic has eased. Third quarter earnings have beaten Wall Street analysts' estimates by a wide margin, leaving open the real possibility that the better-than-anticipated earnings growth trend could continue. The Fed has ended Quantitative Easing on schedule and without incident. And the mid-term election outcomes are now known.
Removing uncertainties from the market alone can be seen as a catalyst for higher stock levels. There are also several technical factors that reinforce my unabashed bullish stance. The Dow Jones Transportation Average has led the Dow Jones Industrials higher following the mid-October lows. This is an important development and provides Dow Theory confirmation once again of the market's basic uptrend. It is also noteworthy that the Russell 2500 (representing mostly medium and small-cap stocks) has participated in the rebound, marginally outperforming both the DJIA and S&P 500.
The stock market's record high feats in November have not meaningfully altered the DJIA's attractive risk-to-reward ratio, in my opinion. Broad and diverse leadership has remained essentially intact &Amdahl; an important consideration that qualifies last month's sell-off as a constructive correction.
Energy stocks, hard hit by oil price wars and the subsequent drop in West Texas Intermediate Crude appear to be bottoming. Technical support at DJIA 17,000 is well established and I maintain that my revised year-end target of 18,500 could be attainable. As for my longer term, my bullish refrain, “The best is yet to come,” applies.
Eugene E. Peroni Jr. is senior vice president of equity research at Advisors Asset Management. This commentary originally appeared on the firm's website.
