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The views expressed in this report are those of Lesley Beath and may differ from Morningstar's views.

Reviewed this week

• Overview
  A bull trap? Most likely. More...
• Acrux Limited (ACR)
  Still above its 200DMA. More...
• InvoCare (IVC)
  Accumulate, but only on near-term weakness. More...
• Discovery Metals (DML)
  Resilience is encouraging. More...
• Amcor (AMC)
  Upside limited. More...
• Orica (ORI)
  On support, but risk is to the downside. More...
• Suncorp (SUN)
  Hold rating maintained, but SUN is best avoided at these levels. More...

Please note: before making an investment decision, Morningstar recommends you read the fundamental research available on these stocks.

Disclaimer: To the extent that any content in this report constitutes advice, it is general advice that has been prepared by Lesley Beath without taking into account the particular investment objectives, financial situation and particular needs of any individual investors. If necessary, you should consult with a licensed investment adviser or dealer in securities such as a stockbroker before making an investment decision. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

Overview

Volatility remains high as investors continue in a nervous mood. The VIX is consolidating at relatively high levels, although the high registered on August 8 (48) has not been surpassed. The activity in the VIX is similar to that of May 2010, although the recent action in the equity market has done far more Technical damage than it did last year.

The relatively high level of uncertainty as represented by the action in the VIX, is backed up by bearish sentiment, as measured by the AAII (American Association of Individual Investors).

According to the AAII, last week "bearish sentiment, expectations that stock prices will fall over the next six months, rebounded by 1.1 percentage points to 41.0%. This is the 24th time in 27 weeks that pessimism has been above its historical average of 30%. Bearish sentiment has been at or above 41% during three out of the last four weeks, equalling or exceeding one standard deviation above the average. This puts pessimism at high, but not excessive, levels. The numbers show continued uncertainty on the part of individual investors about where stock prices are headed".

Last week's reading of bearish sentiment compares with levels of 44.8 on August 11 and 49.9 on August 4.

So there is definite uncertainty, rather than excessive pessimism.

If we compare this to the sell-off we had last year, bearish sentiment hit its high in early August when it rose to 57%.

Out of interest, bearish sentiment rose to 70.3% in early March 2009.

And what was its lowest level? - 6% in August 1987.

And the other extreme, when bullish sentiment hit its peak - January 2000 at 75%.

Elsewhere, we can compare the current situation to the May-August 2010 period by looking at the US T-Bond/S&P ratio.

This reached a high of 0.1270 in late August 2010 and topped just below there (0.1240) last week. This ratio is spoken about often in this report and regular readers will know that I find it a useful indicator. Obviously bonds will outperform equities when equity markets undergo a pullback, but what we are trying to determine is when the ratio is about to do something different, to suggest that the pullback in the equity market is more than just a 'normal' correction.

I think that this one is one of those times but one never really knows for sure. We can put forward an educated guess, but in the end it is the market action that will confirm or negate our pre-conceived thoughts.

In that regard, the Bond/S&P 500 ratio will, if it breaks above last August's high, confirm that we are in for a deeper and more long-lasting correction than that which occurred last year. However that could take time to unfold, and there is still the possibility of a pullback to the 1250 level on the S&P 500 before the next downswing occurs.

Another ratio that we can monitor, and one closer to home, is the ratio of the Consumer Staples index to the All Ords.

As Consumer Staples will act as a defensive sector when investors move into less risky assets, we can look at the movement in the ratio and monitor areas of support and resistance; this can give some guidance as to when perceived risk in the broader market could begin to slow. Or on the other hand, accelerate. The ratio hit a high of 1.91 at the end of February 2009 and registered another peak last September. Both peaks were followed by an improvement in investor sentiment, pushing the broader market higher. Of course ratios cannot be used in isolation, nor can sentiment indicators but they can act as a guide to when the mood of the market is about to change.