Downward pressure in the stock market has been building over the past few weeks. Following the July 12th Market Minute titled "Signs of weakness" and the July 27th Market Minute titled "Risk is rising", world stock indexes plunged today. The percentage of the decline caught many investors, including myself, off guard.

Over the last three weeks, the percentage of stocks on the S&P 500 that were trending up dropped from a healthy 70% to only 21%. This decline is similar to what occurred in late 2007. The cause of the today's fall appears to be fresh concerns about the European debt and US economic data that fails to measure up to expected growth levels.

For equity indexes to continue with their bull advance, they need to have 50% or more of their holdings trending up. Prolonged exposure to percentages below 50% elevates the risk of an extended downturn.

As markets are continuing to trade on a 14-16 week cycle, models indicate that the next expected low should arrive in late September. The target for the S&P 500 in September is now at 1125.

Bottom line: The near term outlook for stock indexes is for a continuation of downward pressure over the next 6-8 weeks. Models however still suggest that there is a high probability of positive returns in Q4.

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

COPYRIGHT © 2011 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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