Stock Market Risk Tone Eases Ahead of Most Negative Month

By: Donald_W_Dony

Following the August 15, 2010 market update titled "Supportive tone remains fragile and volatile", market measures have eased slightly to the positive side as September begins to unfold. In the August 15 article, both the NYSE and TSX were in the bearish zone with a majority of their holds trending lower.

Updated models indicate a marginal improvement with 56% of the stocks in the broad-based New York Stock Exchange Composite (NYSE) trading over their 200-day moving average and 54% on Canada's TSX (Charts 1 and 2). The Volatility Index (VIX) has a reading of 21.31 which is still in the moderate risk category of 18 to 33 (Chart 3).

Bottom line: The slight percentage increase of advancing stocks on both major indexes over the past three weeks is favourable news, however, the readings of 56% and 54% on the NYSE and TSX only indicate a more balanced market verses favouring a new bull advance. Indexes need a clear majority (60%-80%) of rising stocks over declining before the main up trend can start again. The current elevated level of the VIX still implies a potential for rapid market movements. Only a ongoing reading of below 18 would suggest a return to calmer equity conditions and a likely resume to a bull market.

Investment approach: As traders all return to their desks this week and volume is expected to increase, the probability of a return to short-term downward pressure remains high. It is important for investors to remember that 73% of market returns in September over the past 50 years have been negative. Caution is still advised over the next few weeks until more evidence of the trading direction in the equity markets is observed.

Please refer to the September newsletter for more information about the present market conditions, the downside targets and leading indicator readings.

Your comments are always welcomed.

By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2010 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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