Just when you think the VIX can't sink any lower, it does. The VIX is now sitting squarely in contrarian land meaning that the chance of the market reversing direction is quite likely. BUT--and this is a big but--the market-leading Dow Transport Index (DTX) decisively broke through major overhead resistance today to hit a new all-time high. This is an extremely bullish technical event. On the one hand we have an extremely bearish sign (low VIX) and on the other hand we have an extremely bullish sign (high DTX), so what's an investor to do?
I still think that buying a bit of portfolio protection wouldn't be a bad thing. On the other hand, I wouldn't want folks to miss out on another potential leg up in this rally. So, if you're itching to take on some long positions, I would follow the crowd. The so-called "smart money" is rotating out of utilities and into consumer staples including food products (Kellogg's (NYSE:K), Pilgrim's Pride (NYSE:PPC)) and tobacco ((Imperial (ITYBY), Reynolds (NYSE:RAI)), automotive retailers (Asbury Automotive (NYSE:ABG), Sonic Automotive (NYSE:SAH)), and airlines (Alaska (NYSE:ALK), Delta (NYSE:DAL), Southwest (NYSE:LUV)). All of the above mentioned stocks broke out to new highs today and many of them sport P/E's lower than the market average. (The current P/E of the S&P 500 is 19.)