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Troubling Signal Heading Into Fourth Quarter

Market Moves

The major market indexes sold off going into the last Friday of the quarter. With only one more session left before the quarter’s end, investors hit the sell button more often than the buy, sending the S&P 500 Index (SPX) closing nearly 0.5% lower for the day and the Nasdaq 100 (NDX) off over 1% with the Russell 2000 (RUT) index down just under 1%. Despite all the selling, the markets didn’t trade on especially high volume and also staged a rally to close well off their intraday lows.

A more troubling signal has been building over the past few months, and on the edge of the quarter’s end, it looks as though this signal may be significant enough for investors to keep an eye on. The on-balance volume (OBV) indicator tracks the net value of trading volume traded on a given day. Usually, this indicator tracks the market closely, but when it begins to diverge, it is an important indicator to watch. When this indicator shows a divergence from price over a persistent time, it could signal a coming reversal of trend. Currently, this indicator shows a months-long divergence leading up to now. It may be signaling a significant fall in prices similar to last year’s final quarter. 

The Volatility Index Is Trending Higher (Not a Good Thing)

The Volatility Index (VIX) shows that it began a trend higher in late July. Because this index tracks the volatility implied by option prices, it is negatively correlated with the S&P 500 index. This means that, when the VIX goes up, the market goes down. Day by day, this index may simply react in opposition to the broader market. However, when the volatility index begins to trend higher over the course of weeks, it can signal that investors are worried about something in the market. Under such conditions, it takes less and less for investors to begin to panic and rapidly sell stocks.

Two exchange-traded products tracking the 90-day and 30-day forward expectations for the VIX are the iPath S&P 500 VIX MT Futures ETN (VXZ) and the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX), respectively. These ETFs are also trending higher. This may be a warning signal for stocks in the fourth quarter.

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The Safety Trade That Is Beating the Market

The price action for shares of The Procter & Gamble Company (PG) shows a multi-month upward trend that simply keeps moving higher no matter what the market appears to be doing. With one noisy exception around the most recent earnings report, the stock’s seemingly inexorable march higher has recently left the broader market behind.

Two reasons for the share price climb likely include the company’s solid business success in consumer staples and a very stable dividend payout. During the past three months, investors have shown continual signs of nervousness. Under such conditions, investors often look for safer investments such as companies that make regular profits and that do business in consumer staples. Such a business is thought to be more recession-proof.

The Bottom Line

U.S. stock indexes dropped far enough to trigger warning signals in the price and volume patterns. Additionally, the Volatility Index is on the rise, and expectations for that index show that it may likely continue to rise. This a bearish signal for investors. That may be one of the reasons a stock like Procter & Gamble has done so well lately.

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