Street Smart Investing
Market Seems To Need Its Wall Of Worry
By Sy Harding, editor
Street Smart Report Online
There's
an old market adage that the market needs a wall of worry to
climb. It's not just a clever saying. Historical data shows that
the prevailing climate in the early stages of rallies is usually
of surrounding conditions that are bleak and worrisome, with
the majority of investors very bearish and pessimistic.
The market has certainly
confirmed its preference for a wall of worry with its action
of recent weeks.
It began to rally several
days before the invasion of Iraq began, with fears high and rising
that terrorists would launch another massive attack on the U.S.
in reprisal, that chemical or biological weapons would be used
against coalition troops, that Saddam Hussein would destroy thousands
of Iraqi oil wells, that he would launch missile attacks on surrounding
countries, particularly Israel, that oil prices would rise from
$38 a barrel to $50 or even $60, which would send world economies
into recessions, that Saddam would poison water systems and destroy
bridges if it became obvious he was losing, that there would
be months of dangerous door-to-door fighting to take Baghdad.
The market loved the
fears and wall of worry. It rallied strongly, beginning with
its largest weekly gain in more than 20 years. But it turned
to the downside this week, on the surface seeming not to like
the good news that none of those feared events materialized.
But then, the majority
opinion for some time has been that the market would suffer when
war fears subside and are replaced by economic realities.
However, the market
was also contrary regarding economic realities once the war fears
subsided this week. The market was up substantially in the early
going on Friday, with the Dow up more than 110 points, but it
turned around and gave it all back when much better than expected
economic numbers were released. The Labor Department reported
on Thursday that unemployment claims had fallen by 38,000 the
prior week. On Friday morning came a remarkable retail sales
report. Retail sales had plunged in February, declining 1.6%,
and were thought to have been very weak again in March as a result
of cold weather, and war and terrorist attack fears keeping consumers
at home and unwilling to spend. Estimates were that retail sales
had grown only 0.3% in March. But Friday's report showed that
instead, sales were up a substantial 2.1% for the month. Meanwhile,
crude oil prices, which have already been coming down dramatically
from their peak a few weeks ago at $38 a barrel, plunged another
$3 Friday morning, to $26.
When the next important
report for the day, the Michigan Consumer Sentiment Index for
early April, came out at 10 a.m. on Friday, and was also much
better than the gloomy forecasts for it, showing consumer sentiment
rose to 83.2 in early April, from 77.6 in March, it seemed like
it was all just too much good news for the market to handle.
The Dow, up more than 110 points at the time, promptly gave it
all back in less than an hour.
Cary Leahey, Senior
U.S. economist at Deutsche Bank, said, "The consumer sentiment
numbers are certainly a positive for the economy. The sentiment
numbers, combined with the retail sales numbers, has economists
like myself, who were sweating bullets about the economy, feeling
better. Those that lowered their estimates for 2nd quarter economic
growth from 3.0% toward 2.0% probably have their erasers out
and are thinking about going back toward a 3% growth forecast."
William O'Grady, VP
of Research at A.G. Edwards, said, "It's really bullish
for stocks. The key issue everyone's been trying to get their
hands around is how much the economic weakness we saw in February
was due to the cold weather and war fears. And the numbers we
saw today suggest it was a lot."
So why is the stock
market sulking?
As a market technician
who believes the market cannot be `timed' by trying to analyze
what surrounding conditions will be, and then trying to determine
how the market will react, I suspect the market's problem is
technical. The Dow and S&P 500 climbed back to the overhead
resistance at their 200-day moving averages early in the week.
Each time they have tried to break up through that important
resistance level the technical resistance has sent them back
to the downside, regardless of whether the surrounding news was
positive or negative.
Those moving averages,
and therefore overhead resistance, are at 8,349 for the Dow,
and at 882 for the S&P 500.
With war worries having
subsided, the expected catastrophic events having not materialized,
and Friday's economic numbers providing at least preliminary
evidence that the decline in consumer confidence and spending
in February was war and weather related and not permanent, you
would think the market has the wind at its back to break up through
that overhead resistance with ease.
But it does seem to
prefer a wall of worry.
Editor's Note:
Sy Harding is president of Asset Management Research Corp., 169
Daniel Webster Hwy, Suite 11, Meredith, NH 03253, publisher of
The Street Smart Report, 1 year, 17 issues, $250 (now
in its 16th year of exceptional market research for professionals
and serious investors) and The Street Smart Report Online
at www.StreetSmartReport.com, 1 year, $225.
Timer Digest has consistently
ranked Mr. Harding in the Top Ten Timers for Stock Market
Timer, Gold Timer and Bond Timer since 1990. In his 1999 book,
Riding the Bear How to Prosper in the Coming Bear Market,
Sy Harding outlined a simple strategy that works in bull and
bear markets, by which investors make the big gains of a bull
market, keep them, and continue to make big gains in the
next bear market (with just two simple trades a year in any S&P
500 Index fund). Total return for the last six years: S&P
500: +28%; Harding's STS: +125.3%. That's thru 3 years of super
bull market and 3 years of a serious bear market! Easily verified.
Check it out at www.StreetSmartReport.com.
