This sector has done well since its buy date in July. At the time the sector was sitting well below support and I set a possible target of $1,000. At this point we are just over $1,000 mark, but the strong seasonal period is ending for gold. There is bad news and good news. The bad news is that October is the worst month for gold. The good news is that gold tends to do well again for November and December.

Consider reducing gold for the October.

When the health care sector entered its seasonal period in mid-August it was in a good position just sitting above support. The sector has since produced a positive return.

Although the seasonal sell date is October 18th for health care, the sector still does relatively well until the end of the year. Investors may want to consider taking partial profits and holding the rest unless support is broken on strong volume @ $27.

The seasonal for this sector just ended. Although it provided a positive return it underperformed the S&P 500 over the same time period. From a technical perspective the sector was not able to break resistance
and turned back. Although the 10-year yield on U.S. Treasuries has turned down recently, utilities has shown relative weakness by not responding positively.

The next seasonal opportunity for this sector is the very short period in the second half of December.

Examining the percentage change in the VIX over the month of October, it can be seen that there are two peaks, one in the second week of October (approximately October 9th) and the other in the last week of October (approximately October 28th). These two peaks have coincided with buying opportunities in the stock market.

The peak in volatility that occurs approximately in the second week of October, tends to take place in bull markets and typically coincides with a correction in the market. The sector that often starts its seasonally strong period at this time is technology. For an indication of the strength of the market, pay attention to the strength of the technology sector relative to the S&P 500. If the market does have a major correction in the second week of October, investors should consider starting to increase their equity positions (within their risk tolerances).

The second peak in volatility often occurs in the last week of October, coinciding with a large correction in the market and a major buying opportunity. I have often written about the best six months of the year, starting on October 28th (buy into the market at the end of the day on October 27th) and fi nishing on May 5th. These six months have on average produced bigger gains and been positive more often, than the other six months of the year.

Over the long-term, the biggest opportunity in October typically presents itself towards the end of October, as the market is often negative for the month at this point. Entering before the last few days of the month can produce large gains. Many market pundits write about the virtues of investing in the best six months of the year – from November to April, inclusive, but miss out on the gains that can be made by entering the market in the last few days of the October. From 1950 to 2008 the S&P 500 has produced an average gain of 1% in the last four market days of October. Last year these days produced a huge gain of 14%. It would be unrealistic to expect a similar performance, but nevertheless investors should prepare for an opportunity to enter the market at this time.

If the market is once again plummeting in October and volatility skyrocketing, investors should remind themselves that October has historically been the most volatile month of the year. It is always hard to enter the market when volatility is increasing, but investors who have relied upon the seasonal trend of an increasing market at the end of October have been rewarded.

The economy is showing signs of faltering and investors are starting to wonder if the market is in for a “reality check.” We have come a long way from March 9th. The S&P 500 has risen 51% and the TSX Composite 45%. The market was oversold in March and priced for disaster. When corporate earnings started to show signs of improvement and the economic numbers stopped their fall, investors started to celebrate. The party has gone on a long time and investors should expect some volatility ahead.

Recently the S&P 500 has started to show signs that a correction could be close at hand. First it has failed to jump the gap that was left behind in the free fall last October. Not being able to get past this point indicates a lack of strength in the market. Second, the S&P 500 has been forming a bearish rising wedge. This formation shows a lack of conviction in the market and if the price action falls below the supporting channel, a correction could be at hand, providing a buying opportunity.

The economic backdrop is also looking glum. It is the recent economic reports that are troublesome. Last week the Chicago Purchasing Managers Index fell to 46.1 (a number below 50 indicates a contraction). After rising in the early summer, the Durable Goods Orders declined 2.4%. In September 263,000 jobs were lost, which was signifi cantly more than the expected number of 175,000. The unemployment rate currently sits at 9.8%, the highest since 1983. After rising from May to July, existing home sales declined 2.7%. Although these numbers are a small snapshot in time, they could portend future reports that are not as good as everyone expects.

It seems that almost everyone agrees that the recession has ended and the argument is about the shape of the recovery curve. With the recent wave of economic reports it is possible that we will start to hear the term “double-dip” recession bantered about in the media. Double dipping in the economy is as bad as double dipping in the salsa bowl at a party – it is best if we do not. If we start to slide into another recession the effectiveness of the stimulus packages and all of the government spending will be heavily scrutinized and questioned.

If we compare the current “bullishness” in the stock market against the backdrop of the economic numbers, it is evident that there is a disconnect. The NYSE Bullish Percent Index is currently showing the market has bullish expectations and is sitting at 77. A number above 70 indicates that the market is overbought.

What are the implications of the disconnect? Volatility. It used to be that October had the reputation for being the worst month of the year. After all, some of the biggest drops in the market have occurred in October. The Dow Jones dropped over 20% in October in both 1929 and 1987. The negative stigma lingers even today as the press often refl ects on the scary drops of yesteryear. Despite its “bad” reputation October has produced an average gain 0.9% in the S&P 500 from 1950 to 2008 and is ranked as the sixth best month of the year. There is one market measure in which October reigns supreme over all of the other months – volatility.

When the average investor hears the word “volatility,”they immediately think of market corrections or sell-offs, but volatility has two sides of the coin. Essentially volatility is the variation in price of a security relative to its average over a period of time. Therefore, volatility is affected by both downward and upward moves in price. As a result, an increase in volatility does necessarily mean that the price of a security is headed down and often provides a buying opportunity.

The market generally measures volatility with the VIX, which is the ticker symbol for the Chicago Board Options Exchange Volatility Index. The index measures the implied volatility of the S&P 500 options. A high value represents a more volatile market and is generated by more expensive options. It is often referred to as the “fear index” as higher values represent expectations of a volatile market in the short-term.

The VIX from 1990 (start of data set) to 2008 has on average started to rise in July, increased through the summer months and peaked in October. The graph VIX Avg… Year 1990-2008 Cumulative % Increase illustrates the changing volatility throughout the year by plotting the percent change in the VIX. As volatility reaches a peak in October investors tend to freeze, stop investing or sell some of their holdings. Historically, this has not been the time to sell, but to buy.

Most investors find it hard to buy into the market as volatility spikes. The spikes in volatility that occur in October often coincide with a bottom in the stock market and a good entry point to increase equities for the next six months.