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March 24, 2010, 8:04 p.m. EDT · Recommend (3) · Post:
By Nick Godt, MarketWatch
NEW YORK (MarketWatch) -- As U.S. stocks crawled to new highs for the year early this week, calls that the market was long overdue for a correction continued to mount.
Might a potential new crisis in Portugal finally convince the bulls to throw in the towel and let the bears have a real pull-back in stocks?
Setting aside the reality of the debt problem in Portugal, market behavior so far this week suggests that for stocks, in any case, this too shall pass.
Take Monday: A number of pundits were warning that healthcare reform and dire implications for American capitalism would sink the market. The Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (INDU 10,898, +62.05, +0.57%) proceeded to climb to 18-month highs over the next two sessions.
"I said, 'obviously, Wall Street likes health-care reform' -- and got of lot dirty looks," said Paul Nolte, the managing director at Dearborn Partner.
There were rational reasons why some health-care stocks should benefit from reform. Read more on the market's reaction to health-care reform.
But for Nolte, and other strategists like him, the way the market reacts is mostly interesting for what it says about its strength and its direction.
Monday and Tuesday's advance repeated a now-familiar pattern for the market so far this year: Stocks keep grinding higher in low volumes and most challenges, or daily news items worthy of worrying about, are met by quick and shallow bouts of selling that clear the way for a move higher.
Even the Dubai crisis last November and the Greek debt crisis in late January have only led to mild pull-backs of between 5% and 7%.
But "everyone is yawning about it now," says Nolte of the Greek crisis.
Wednesday morning news that the Fitch Ratings agency downgraded Portugal's sovereign rating did cause a pull-back, but a mild one. Both the Dow industrials and the S&P 500 index /quotes/comstock/21z!i1:in\x (SPX 1,173, +4.80, +0.41%) ended down by about half a percent. Read more on the Portugal downgrade.
This type of behavior is what contrarian investors call "climbing a wall of worry," as was seen since the big rally in stocks began in March of last year. Previous reasons to worry that don't end up being the end of the world turn into more reasons to buy for the bulls.
Ron Meisels, founder of Phases & Cycles in Montreal, takes contrarian investing a step further: If a lot of the talk in the market and big media headlines are telling you to worry, good things should follow.
By contrast, real reasons to worry, such as the housing bubble and the accumulation of factors that eventually led to the financial crisis and the global recession, were shrugged off by most everybody between 2005 and 2007.
The state of the market over the rest of the year isn't correlated with the solid performance for the first quarter, and investors already have baked in the recovery, MarketWatch's Mark Hulbert tells Kelsey Hubbard in the News Hub.
But "right now, it's amazing to see how worried and negative people remain," Meisels said. "With our international clients, the often-heard question is 'we're up by so much, how much further can we go?'"
But Meisels likes to compare some of the main media reaction to the more than 70% advance by the S&P 500 index from its lows in March 2009, to the 67% rally by the S&P in 1982.
Exactly one year after the start of the 1982 rally, Time magazine ran the headline 'Happy Birthday, Bull Market," and suggested the "ride may not be over yet."
After that headline, the S&P proceeded to fall by 10%.
On March 9, the birthday of the current rally, The Wall Street Journal ran the headline: 'Worries Rebound on Bull's Birthday.' (The Journal, like MarketWatch, is owned by News Corp.)
Signs such as these, and the lack of volume in the market, "just shows me people are not bullish, which is good," Meisels said.
While retail investors stay largely away from stocks, it is market professionals, part of the so-called "smart money," who are currently running the show.
And "market professionals from day to day will worry about things that they think are worthy of worrying about," Meisels said. "But they will be happy to use these events to add to their positions. Fantastically, good news is usually at the top of a market."
Nick Godt is MarketWatch's markets editor, based in New York.
Credit Suisse chief earned his $17.9 million in cash and stock.
11:12 a.m. Today11:12 a.m. March 25, 2010 | Comments: 7
- DrFever | 7:11 p.m. March 24, 2010
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