Discounting the Known Negatives

 | Nov 17, 2011 | 9:03 AM EST
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It is not our mistakes that define who we are; it is how we recover from those mistakes.
-- Bo Bennett

The most significant characteristic of recent market action is that the bears have been unable to gain any traction on negative European news. We have had some sharp dips, like we saw yesterday afternoon, but the buyers are out there and they have provided support fairly quickly every time the market starts to worry about big-picture negatives.

Again, the main reason for this support is that we have a lot of underinvested market players who are anxious to make up performance before the end of the year. They have a low level of trust in the market because of all the very obvious negatives, and that has kept them on the sidelines to some degree.

To put it in very simple terms, we have a lot of dip-buyers out there who want to jump in and catch a bounce, and that gives us consistent support. The fact that we have bounced back quickly from every dip since we hit the low of the year in early October is reinforcing that behavior.

Since the low on Oct. 4, we have had only one run of three negative days in a row. In all other cases we immediately bounced back after one down day. Given that pattern it shouldn't be at all surprising that market players continue to anticipate that we will bounce back quickly after the latest European scare.

The dynamics of the current market environment are really quite intriguing. We continue to have this very gloomy European situation overhanging the market, and the "super-committee" and a struggling domestic environment are headwinds as well. Making a bearish big-picture argument against this market is so easy that it is having little impact. Everyone is already skeptical and cautious. Even the bulls are quick to acknowledge that we are likely to see a continuation of negative news especially out of Europe.

I've been maintaining a bullish bias lately because I believe these dynamics are an ideal "wall of worry" situation. We have obvious worries, underinvested market players who need to produce performance and positive seasonality. The bad news that we are seeing isn't all that surprising, and that invites the dip-buyers to step in quickly.

Economic reports were just released, and both unemployment and housing are a bit better than expected. That is giving us a boost but there is some nervousness out there and the dip-buyers aren't too energetic yet.

The market has battled back from weak opens impressively in the past few days, so you can bet that traders will be looking to catch another bounce. If we start to recover they should inch back in the longer we hold up.

The bears have Europe as their main focus, but the bulls have consistently demonstrated that they just don't care too much about it and are willing to jump back in after each negative salvo. I'm looking for them to continue that pattern.

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