Stocks are set for some mild upside after a day of robust gains on Monday. The Dow Jones Industrial Average led the market higher as banks and oil brought in some new money. Breadth was good but the pockets of momentum were tepid.
Economic news around the world was solid and worries about a trade war were forgotten. Much of the news coverage was about the Supreme Court pick, which has few market implications. It was an environment where if you wanted to play then you had to be a buyer.
To understand what is driving this market you have to understand the concept of "climbing a wall of worry." The dynamics at work right now are a classic example of this powerful force.
Every market has a supply of very smart bears who will argue in very logical and compelling terms why the market is about to fall apart. They always are quite convincing but market players will ignore them as stocks uptrend and they focus on making money rather than worrying about negative arguments.
The current environment is a bit different because there are so many people now convinced that the day or reckoning is approaching. Worries about an impending correction are increasing and market players are now more wary than they have been in a while.
Sentiment polls, mutual fund outflows, put/call ratios and other metrics are reflecting increased uncertainty.
There isn't any big mystery about why this is occurring. The constant headlines about trade wars, concerns that the bull market is growing old, the end of quantitative easing by central banks, weakness in Chinese and emerging markets, endless negative headlines about Donald Trump and pundits that tell us that we are the verge of a major downfall.
A good example of the type of negative we are seeing is a call by Scott Minerd of Guggenheim Partners. Monday he stated that this market rally is the "last hurrah" and that the trade war issue will be "cold water in the face of the market" at some point. He advises that investors sell their stocks now.
Despite this constant drumbeat of negativity and worry, stocks are holding up. The gains Monday were sizable and there is decent follow-through early this morning. The market is climbing that wall of worry.
One thing market players hate almost as much as losses, is missing out on gains. When the market refuses to succumb to the negative arguments of people like Mr. Minerd, investors decide that they might as well join the party rather than stand on the sidelines. What if these pessimistic pundits are wrong, like they are so often?
Despite the negative predictions, capital is put to work and that helps to push stocks up even more. The trend gains some traction and that forces more market players to fear that they are missing out because of some arguments that the market doesn't care about.
The worries and concerns continue to be broadcast but the price action refuses to cooperate with the bears so more and more money keeps coming in and the indices climb higher. The irony is that the negativity helps to preserve a reserve of idle cash that keeps on supporting the market.
At some point this climbing the wall of worry dynamic will come to abrupt end as market players suddenly start to think that maybe there is some good reason to be a bit concerned. However, there is no way to know when that might be and, more often than not, the upward trend continues long enough to make people think it was stupid to even be worried in the first place.
That is the "climbing the wall of worry" that is driving this market. Maybe the worries are well justified but the market doesn't care right now and that is what keeps pushing things higher.