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Volatility Likely to Stay Elevated in September

ByMichael Baron, Deputy Managing Editor

NEW YORK (TheStreet) -- August's wild ride is almost over for stocks but September isn't likely to offer much of a respite, according to new commentary from Standard & Poor's. Not only is September historically the worst month for equities -- the S&P 500 is down an average of 0.5% during the month since 1945 vs. a gain of 0.7% for all 12 months -- but it's also the third most volatile month of the year on a historical basis, as measured by the frequency of high-low percent swings in excess of 10%. Another indicator that stocks could see more violent swings is the percentage spread for the S&P 500 from its intraday high and low readings in August. The 18.7% reading is the widest seen since the 24.9% spread registered in March 2009 when stocks bottomed out from the financial crisis. "Heightened volatility is likely to be part of 'the new normal,' in our opinion, whether you rely on ancient history or just point to the recent past," Sam Stovall, chief investment strategist at S&P, writes in research note on Monday. "Looking to the number of times per year in which the S&P 500 advanced or declined by 2% or more in a single day, the market is currently about three times more volatile than it was in the past." Stovall observes that, from 1950 through 1999, the S&P 500 rose or fell by 2% or more in a single session an average of five times per year. Since 1999, however, the averages have jumped to 12.5 times per year for advances and 14 times for declines. "Who or what deserves the blame? High frequency trading, hedge funds, inverse and leveraged ETFs, take your pick," Stovall says. "So, if you think the S&P 500 has become more volatile in the past decade, you are correct, and now you can prove it." After last week's strong performance for stocks -- the major U.S. equity indices delivered their best weekly gain in two months -- Stovall says the market appears to be in the midst of a counter-trend rally that looks promising in the next few weeks from technical standpoint. He cites commentary from Mark Arbeter, S&P's chief technical strategist, who said on Friday the major indices "continue to work" on a potential double-bottom reversal pattern. "While more price gains are needed to finish a bullish reversal for stocks, we believe there is decent upside potential in the near- to intermediate-term," Arbeter wrote. "A bullish breakout would open the door to the next region of chart resistance at 1,250 to 1,260. This area seems to be many technical analysts' target for a potential rebound, and when so many line up at one area, the market is likely to under- or over-shoot this region." The S&P 500 was up 2% to 1199 in recent action as stocks rallied after Hurricane Irene wasn't as bad as feared over the weekend and personal spending data came in better than expected, registering its best performance since December 2009. The rest of this week's trading will build up to Friday's employment report for August. Stovall says S&P economists are expecting non-farm payrolls to rise 50,000 this month following an increase of 117,000 in July but other firms wondered if it's possible the U.S. economy actually lost jobs in August. The Dow Jones Industrial Average rose nearly 173 points to 11,457 in morning trades, while the Nasdaq was tacking on 2.1%, or 52 points, to 2532. Bank of America was spurring the Dow higher with a 5%-plus gain to $8.12 after the bank said it's selling roughly half of its stake in China Construction Bank, or 13.1 billion shares, for $8.3 billion. The buying was widespread, however, as all 30 Dow components were in positive territory with Alcoa , Pfizer , and Travelers Cos. all gaining more than 3%. The VIX, known as Wall Street's fear gauge, was down more than 6% to 33.14 on Monday. The index is derived from options activity within the S&P 500, providing a snapshot of how bullish or bearish investors are by measuring hedging activity. Prior to Aug. 8, when the VIX closed at 48, the index hadn't been above 40 since May 2010. --Written by Michael Baron in New York. >To contact the writer of this article, click here: Michael Baron.

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