'Wall of Worry' Opens Door to Profits
Tuesday, August 19, 2008 | Chris RoweRating:
Ever hear the trader's expression: "The market is climbing a wall of worry?"What does it mean?
Investopedia says it's "a phrase used to describe a bullish market trend occurring in the face of negative uncertainties.
"When stock prices are rising regardless of market uncertainties, the stock market is said to be climbing a wall of worry. These worries may include political or economic risks. Once the perceived risks have been resolved or have passed, average market share prices tend to decline."
In other words, when the market is overcome with fear, it has likely reached a bottom and will trend higher. But as the market becomes more complacent, it has typically reached a top and is about to take all of those winnings away.
Strong advances are found when the market is climbing the so-called "wall of worry". And that's what we are seeing right now. In the face of excessively bearish sentiment, more and more buyers are entering the market.
If you look at a chart of any major U.S. index, it might appear to most investors that the market has made minimal upside progress, if any, over the last month. But the internal picture tells a different story.
In every trading session over the past two weeks, a larger number of stocks has generated buy signals than has generated sell signals, and that happened on both the NYSE composite as well as the NASDAQ composite.
Why is this so significant? When a stock generates a buy signal, the demand for the stock outweighs supply at a key price point that the stock had previously been unable to move above due to heavy selling pressure. In other words, either the sellers of the stock at that particular price point are no longer sellers, or the buyers bought so much stock at that price, that the sellers have nothing left to sell, thus the stock moves higher. Once the "resistance level" has been penetrated, it is MUCH easier for the stock to continue higher. It's a significant achievement, and we are seeing that happen with an increasing number of stocks every single day.
At the recent stock market bottom in mid-July, the NASDAQ composite had 24% of stocks on buy signals (the rest on sell signals) and the NYSE composite had 25% on buy signals (the rest on sell signals). One month later (as of Monday, August 18) 36% of stocks on the NASDAQ are on buy signals and 39.5% on the NYSE are on buy signals.
If this were to occur while the market wasn't very concerned about a decline or about severe economic issues, it would still be a pretty notable achievement. But this is all happening when investors are still experiencing a high stress level and there are more bearish advisors out there than there are bullish advisors. So the achievement is that much more significant!
The Investors Intelligence Advisors Sentiment reading is a measure of the bullishness or bearishness of over 200 newsletter writers Long story short, it is a great "contrary indicator". When investors are overly bearish, it's typically a sign that we are near a bottom (not to be confused with THE bottom). The reading recently showed levels of bearishness not seen since late 1994!
Let me repeat what I continue to tell members of The Trend Rider: We are looking at an intermediate-term advance within a long-term decline. So the intermediate bullishness I'm talking about today will likely eventually rejoin the long-term bearishness and we'll be ready to take advantage when we see that.
As for now?
It seems like every week a new institutional stock scandal or some sort of manipulation is being uncovered. We are constantly reminded of how high gas prices are, how much the value of our homes is dropping, and how many jobs aren't being created in this economy.
Barron's just published an article about Fannie Mae (FNM) and Freddie Mac (FRE) regarding the increasing likelihood of a U.S. Treasury bailout that would approach nationalization of the two. It pointed out that such a move could wipe out existing holders of common stock in the largest U.S. home funding companies. Mortgage companies are feeling the pinch of margin calls from their own lenders as home prices continue to fall. I mean, all of this literally hits home and it is so in your face that it's hard not to be bearish.
Yet, with all of this fear, institutions are buying.
We are seeing more and more stocks moving through key resistance levels in the face of this bearish tone. Any stock market pullbacks have been met with new buyers. Institutional investors are still in accumulation mode after recently seeing the market move up and out of oversold territory. Oversold territory is what we see when just about all the stock selling that is going to happen, has happened.
Remember, when people are excessively bearish, that means they probably already did a lot of selling, so a lot of the pressure is out of the way for now.
So don't be part of the herd. Be comfortable being the minority in the stock market because the minority makes money from the majority's herd mentality.
The two keys are:
1. Staying in the right sectors (more importantly - out of the wrong sectors)
2. Being able to change your stance from bullish to bearish when the time is right. Knowing when the time is right isn't the difficult part. Acting on that knowledge, even when it means exiting or hedging positions you're not profitable on, is the hard part. But it must be done, and you'll usually be happy about the decision in hind sight.
See ya next Tuesday! Your comments by clicking below are appreciated.
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“Profit from the Trend”
Chris Rowe
Chief Investment Officer
The Trend Rider
