"That the birds of worry and care fly over your head, this you cannot change, but that they build nests in your hair, this you can prevent." --Chinese Proverb
A little softness in the euro and comments about slow PC sales from Microsoft (MSFT) have the market resting after a big day Tuesday. The big question now is whether we can further build on the nearly 3% gain we have enjoyed during the first six trading days of 2012.
Understandably, the bulls are excited about this action, but it has been somewhat deceptive. All the gains have come on two overnight gaps while the market has not made much progress intraday. If you are a day trader and haven't held much overnight, you have been shut out of the action.
We have seen light volume, a continued lack of good leadership, a paucity of strong technical setups and a little momentum. It's the price action, though, that's the key, and you can't argue with a 3% gain. As I've said many times, the easiest way to get hurt in this market is to underestimate how far it can run on light volume.
The big issue is whether earnings season is going to serve as a further upside catalyst. We have had a large number of warnings and misses already, which should help to suppress expectations, but the indices are hitting multi-month highs, which is obviously not a sign of great worry.
What we are seeing is something this market has done extremely well over the last few years: climbing a wall of worry. The bears seem to have little difficulty finding good reasons to bet against the market, but action like we've had this past week creates a large supply of underinvested bulls who will turn into aggressive dip buyers. The fact that there are so many easy negative arguments in the fact of the rising market just ends up building strong underlying support.
Anyone who has been paying attention knows that we have had one of the worst seasons for earnings warnings in years, but it hasn't mattered because so many market players are more worried about missing out on upside than they are about bad fundamental news. Nothing drives buyers more than the fear of being left behind.
The dip buyers have an opportunity this morning, and it will be instructive to see how aggressive they are. Technically, we need a rest, but market action like we've had recently often results in extremely shallow pullbacks, as there is so much anxiety over not having enough long exposure. The lack of momentum in individual stocks just makes it tough.
There is very little news flow, and the consensus seems to be that the market is due for a little rest before it continues on its ascent. That sort of complacency is a bit worrisome, but I'm not expecting any real movement in the market until earnings start rolling out next week.