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The Wall of Worry Is Shrinking, Just Like the Supply of US Stocks...


Does the stock market rally have you confused? Take a number and join the line.

There was a time, long, long ago, when the markets made more sense. The fish market, the supermarket, the housing market, the bond market, the stock market -- the basic rules of cause and effect held true in every one. Now it seems less and less so. It is high time to talk about why. Let's go to the markets.

The fish market -- well, for the most part the fishmonger is no more here in the US, so we will say that the fish market sleeps with the fishes and leave it at that. The supermarket has become an overstocked, oversized, and often overpriced version of its former self; perhaps the industry is still living in the days of paper newspapers and leaded gasoline cars. The housing market is now driven by $85 billion of monthly Federal Reserve mortgages and its impact on mortgage rates and the bond market is seemingly influenced by the same big money body and its big-time Treasury buying.

Last but foremost on our mind is the stock market. After yet another strong week for the Dow (INDEXDJX:.DJI), the S&P 500 (INDEXSP:.INX), and the Nasdaq (INDEXNASDAQ:.IXIC), as they continued their enduring climb higher even in the face of danger, I offer the classic rule of supply and demand as part of the reason why.

A recent insightful news article I read laid out the fact that over the last 10 years, thousands of public companies delisted or left the public markets. Currently, the Wilshire 5000 Index (NYSEARCA:WFVK) has fewer than 4,000 stocks in it (and as its name implies, it's kinda supposed to have 5000). Add to the equation a not-so-robust IPO decade and you are left with fewer stocks to buy in the US. This does not look likely to change in the near term. So after five years of stock market selling by most everyone, the selling has slowed and a trickle of cash is coming off the sidelines and buying stocks. More stock demand coupled with less stock supply is simply trumping weakening company fundamentals. Will this continue? If interest rates stay this low and alternatives for cash remain so rare, it just may.

As it is said, sometimes it's a stock market; sometimes it's a market of stocks. Right now, I see it as a market of stocks and demand is outstripping supply.

Still confused? You are not alone. Just hang on to your number and feel free to talk with the people next to you in line. Confusion, much like misery, loves company.

The Wall of Worry falls to 23 blocks this week; 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: We could get less; we could get more. Which way will the wind blow?

US ECONOMY: Stuck in second gear. Kind of like setting "the cruise control at 35."

UNEMPLOYMENT: Just when it was looking like all was lost, we get a win. Start of a new streak?

INVESTOR SENTIMENT: The stock market with its multi-minute flash crashes still looking more like snake oil than real oil to Mom and Pop out there.

HOUSING CRISIS: Sell, sell, sell is seeing some buy, buy, buy. Good, good, good!

EUROPEAN ECONOMY: The first rule is that you have to at least try. "You gotta get up and try, try, try…"

FRANCE: French citizens starting to demonstrate their dissatisfaction with President Hollande's tenure as the French economy demonstrates absolutely nothing at all.

DEFLATION: Global central banks have one unified response to this potential scourge: "Pump up the jam…pump it up a little more, get the party going…"

SPAIN: The unemployment rate tops 27%. I get upset just writing that; I can't imagine living through it.

VOLATILITY: Okay, up market volatility we can tolerate. But don't forget what the aptly named group Blood, Sweat & Tears says on this subject: "What goes up, must come down…"

Lloyd: What do you think of the market action?
HAL: When you can only get off a few days of a gold flash crash and barely a few minutes of a Dow Jones Industrial Average flash crash, clearly nothing is sacred anymore.

CHINA: You and your potentially-less-than-7% GDP growth numbers are making us all very GD nervous.

ITALIAN ELECTIONS: New government has been sworn in. Now the real swearing will begin!

GLOBAL ECONOMY: Spring, a time for renewal and hope and for the world economy to swoon once again.

JAPAN: If they get their economy to grow one-tenth as fast as their stock market has in the last few months, all will be well in the garden.

EARNINGS SEASON: Still going, but no need to fear it will end…about one week before the pre-announcement season begins.

DRAGHI: Rate cut sends a clear message: Bumblebee is still buzzing.

NORTH KOREA: Time for the State Department to make a list of retired near-great athletes willing to visit for a fee and a photo op.

SEQUESTRATION: Spending cuts are always messy and this non-plan plan is already looking like a morning-after fraternity party living room.

PORTUGAL: Considering more austerity, not less. Worked for Ireland; it wasn't fun, though.

SYRIA: Surprise, surprise…situation getting worse and worse.

GOLD: Did anyone get the license plate of that 18-wheeler that just ran over Mr. Yellow Metal?

TERRORISM: Nothing really to say about this. It just is.

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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Author owns positions in SPY, DIA, and GLD.
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