The Wall of Worry Won't Come Down

 | Nov 16, 2011 | 8:57 AM EST
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"The best things in life are unexpected -- because there were no expectations." --Eli Khamarov

It would be nice to start the day without the market jumping around to the latest news out of Europe. Unfortunately, today is not that day. We have a number of developments in Europe, including an Italian bank asking the European Central Bank for funding. That is causing early volatility.

The good news is that the market has been shrugging off the latest worries in Europe once trading begins. We are still highly sensitive to headlines, but market players have consistently used the pullbacks as buying opportunities. They are not panicking over negative news, although the issues in Europe continue to be formidable.

Tuesday was a good example of how strong the underlying support continues to be. The market drifted lower on light volume all morning and was about to take out the lows of the day when it suddenly turned up on no apparent news. Once it started to tick up, the buyers jumped in quickly and we rallied all afternoon before a little profit-taking at the close.

The fact that there was no news catalyst leads me to conclude that a lot of bulls are underinvested and worried that they will miss out on further upside.

This is the wall of worry that I've been talking about lately. Market players don't buy because they feel bullish, but because they have been bearish and are worried they may be wrong and the market may run up without them. Every time we find some support and start to tick up, the folks on the sidelines rush to join the party, just in case.

In addition to the wall of worry, I've also been discussing the favorable technical pattern that has been developing. Since breaking out of a two-month trading range in mid-October, we have been consolidating nicely and have a good setup from which to attempt a run at recent highs over the S&P 500's 200-day simple moving average at 1271.

Helene Meisler pointed out yesterday that this bullish-looking symmetrical triangle in the indices is becoming almost too obvious. Everyone sees it just like everyone sees all the negatives out of Europe. Typically, when something is too obvious, it undermines the validity of the pattern because folks tend to act in an anticipatory manner, and that means there are fewer buyers to fulfill the pattern.

The real question is whether market players are overly confident about a year-end rally and are already heavily long. The way the market has been acting lately, I don't have the sense that market players are well positioned for upside. In fact, I believe they are underinvested and worried about Europe, and that is offsetting any optimism about the favorable technical patterns.

In other words, I believe we still have a wall of worry firmly in place, and that is reflected in the bullish technical pattern. Market players aren't overly optimistic; they are worried about missing out and that is more likely to make the pattern play out rather than fail.

I'm always ready to change my thesis as the price action develops, but for now I'm going to continue to lean bullish. We are likely to be choppy, but I'm looking for the dip buyers to continue support. I'd be much more optimistic if I had a longer list of potential buys, but the fact that there aren't that many is probably why we are seeing the wall of worry.

We have a little softness to start the day, which will be a good test to see how anxious dip buyers are to grab some long exposure.

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