Early October sell-off flashes buy signal
The fourth quarter kick-off was a bust as broad selling hit the major U.S. averages and pushed small cap stocks closer to correction territory. The Russell 2000 (^RUT) is down over 9% from highs reached back in July. Despite the steep sell-off for U.S. stocks, ConvergEX’s Chief Market Strategist Nick Colas says an October swoon is to be expected.
“October actually is a fairly volatile month. If you look at the CBOE VIX Index (^VIX), the fear index, and chart how many times it peaks in October, it's 4X over the last 25 years or double what you would expect to be the average of roughly two. October really is a risky month.”
The CBOE VIX Index, which measures fear and anxiety in the market, is up more than 50% since July trending around the 17 level. This remains well below the 40 level the VIX reached in 2011 during October.
Despite the risks, Colas believes a correction is long overdue - about three years overdue - and necessary before the markets can resume an upward trend. “Look for more volatility in the near-term, and yes it is a buying opportunity because through the end of the year we do tend to get that kind of a rally," he says. "And with corporate earnings still good, interest rates still low, it does seem that is the right trajectory to look for.”
Corporate earnings for the S&P 500 (^GSPC) are expected to hit a new record in the third and fourth quarters, according to Standard and Poor’s Howard Silverblatt.
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