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The Technicals Say Correction, the Markets Say Incorrect


As market watchers disagree over what's coming next, inflows into the US equity markets have begun.

The Dow (INDEXDJX:.DJI), S&P 500 (INDEXSP:.INX), and Nasdaq (INDEXNASDAQ:.IXIC) are all up 5% so far in July and the technicals are stretched tighter than the waistline on Humpty Dumpty's pants, so we have to correct, right? Well, as it is said in jazzy Bluesland, "It Ain't Necessarily So."

It is fair to say that inflows into stocks have begun and they are coming from near and far, as the US equity markets are seen as the safest on the planet. 2008 seems to be a distant memory -- at least for the time being.

On the earnings-season front, things are okay. Not stellar, not catastrophic, just okay on the whole and perhaps that's good enough to keep the longest stock market rally in a long time going for a good bit longer. The biggest cause for concern is a lack of demand to drive top-line sales, and companies will need to see some soon as they will only be able to squeeze out bottom-line profitability for so many more quarters. How many more is the question, and the answer is in a crystal ball that has yet to be discovered.

Under the heading, "Things that make me go worrying..." I direct you to the latest round of interest rate increases -- yes, increases mean up -- from Turkey, Brazil, and India. Their central bankers are putting on the full court press to defend flagging currencies. Tough to do when your homeland economy is weak, but sometimes you need to make a choice: my economy or my currency, or in these cases, my inflation rate. Yup, there is some inflation in the world and it is causing problems. How this plays out? Sure wish someone would find that crystal ball already.

Click on the image below for an interactive version of this week's Wall of Worry, or scroll down for the text-only version and an explanation of how the Wall works.

QE: Who will be the next driver at the Fed? Yellen? Summers? The "free" markets?

UNEMPLOYMENT: Jobs, jobs, jobs! The 2014 mid-term politicking has begun.

US ECONOMY: Big number coming on Friday, August 2. Some looking for +1-2%, some looking for 0.0%, most looking forward to the weekend that will follow.

INVESTOR SENTIMENT: Here come the inflows in equities and here comes the bajillionth reference to the movie Wall Street's "greed is good" speech...

HOUSING CRISIS: With inventories low and home sales rising, this worry is about to be renamed "Housing Recovery." Press release forthcoming.

EUROPEAN ECONOMY: Germany busts through the 50.0 PMI level and this time it's going in the right (up) direction. Italy, Spain, France, etc. -- care to go with?

VOLATILITY: Nice and low and eerie and looking for a reason to spike.

Lloyd: Taking off any time in August?
HAL: Nope. Gonna use the time to catch up on some work.
Lloyd: What kind of work?
HAL: Think of it this way: If my work is successful, you'll be back in the office with me.

CHINA: Put a five-year moratorium on the construction of new government buildings to cut "wasteful government spending." To which the Wall asks, is there any other kind?

GLOBAL ECONOMY: May be bottoming out. "Can they grow without creating inflation?" asks Monsieur Killjoy.

JAPAN: Still waiting on that blueprint for economic growth. Please don't take another decade to do it.

SEQUESTRATION: Handy political excuse for the sub-2.0% GDP growth in the US. Less handy for the proletariat in the US looking for work, though.

BONDS: Hey Mr. Bubble, what happens after you pop?

TECHNICALS: Short-term market technicals look dicey. Medium-term and long-term outlook depend on how dicey the short-term is.

CENTRAL BANKS: Turkey, India, and Brazil are raising rates to bolster their sagging currencies. Oh, the currency winds they are a-stirrin' and a-blowin'.

THE NIKKEI: They will write books about this market action some day. Hopefully then we will all understand it.

SHIBOR: Flirting with dropping below 3.00%. Soon the "it's too low!" cries will come. Wait for it, wait for it...

BRAZIL: To estimate their GDP growth, just take China's GDP growth, divide it by four, and add a percent or two when the World Cup and the Olympics come to town.

SPAIN: Spin the Crisis Roulette Wheel! Political Crisis, Debt Crisis, Employment Crisis, Housing Crisis, Banking Crisis... Politics, Debt, Employment, Housing, Banking... Politics it is!

COMMODITIES: Dr. Copper starting to creep up off its lows. And as it is said here on the Wall, the world may run on oil, but it grows on copper.

EARNINGS SEASON: As we come into the home stretch, the bottom lines look good and the top lines look not so bad. Victory!

What Is Lloyd's Wall of Worry?

by Lloyd Khaner

Welcome to my at-a-glance guide to the issues facing investors this week -- a unique tool for traders and money managers.

Typically the term "wall of worry" refers to the entire body of concerns influencing stock market action. When the wall is high, meaning the market is nervous, stocks tend to get cheaper.

This wall of worry is even more specific. Every week I list the exact concerns in the marketplace and use the list to help me make buying and selling decisions. As I like to say, "Buy fear, sell cheer."

In other words, once the the wall rises above 15 blocks, start looking for deals. If the worry count sinks below 10, consider selling; prices have likely peaked.
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LK/KCLP Ownership Disclosure: SPY, DIA, GLD, TBF, LQD.
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