Wednesday, May 9, 2012

Wall of Optimism?

During the market run-up over the past couple years, market pundits have often referred to a “Wall of Worry” that the bull market kept climbing. Since peaking on April 2nd this year, the market on a number of occasions has dropped substantially at and shortly after the US market open, only to rally substantially approaching and following the close of European markets. A Euro zone double dip recession, rising sovereign debt yields and recent elections have brought European risks back to the headlines in the past couple days. This appears to be having a significant effect on US stock markets as seen in the following chart (courtesy of Bloomberg):

During the past two days, the S&P 500 has dropped about 15 points (over 1%) at the open and dropped further, to a low of more than 20 points down, a bit after 10am. However following these sharp sell offs, the index rallied back over 15 points to erase most of the losses. If the “Wall of Worry” truly existed (of which I’m skeptical), than presumably the same effects could work in reverse. Are the big reversals of the past two days a sign that a “Wall of Optimism” is now present? Have investors become so optimistic about a virtuous cycle in the US, smooth resolution in Europe and soft-landing in China that all dips must be bought regardless of how much news contradicts those presumptions?

Events of the past two days can either be taken as bullish resilience, bearish complacency or simply worthless noise. My preference lies in a combination of the latter two but I’m not willing to make a significant bet either way at this time. What significance, if any, do you think these moves hold?

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