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Wall of Worry: As the News Flow Slows, Will the Rally Stay Strong?


The volatility crowd likes to say that when nothing is happening, anything is possible. Wishful thinking or not, they have a point.

As we exit earnings season and enter the most august time of year, there is one thing you can count on: News flow will go slo-mo. Barring a Katrina-like event (2005) or some other black swan/unknown unknown swooping in, the markets are facing a quiet information period. And with the Dow (INDEXDJX:.DJI), S&P 500 (INDEXSP:.INX), and Nasdaq (INDEXNASDAQ:.IXIC) bumping up against annual advances of 20%, no news may be good news... or maybe not. The volatility crowd likes to say that when nothing is happening, anything is possible. Wishful thinking or not, they have a point.

What looked like an easy bet on who would be the next Federal Reserve Chairperson has turned into a roulette wheel, and that little ball sure seems to be bouncing around a lot. Round and round she goes, where she stops, only President Obama knows.

And under the heading "the trend is your friend," inflows into equities surged in July and the beneficiaries were mutual funds as well as ETFs and stocks. So this may be the start of Mom and Pop getting back into the market after five years of sideline watching. The August and September flow numbers should tell the tale. Let's hope it's a long, bullish tale at that.

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: Taper me this, taper me that, who's afraid of the less-paper-buying chat?

UNEMPLOYMENT: Plenty of people free for the annual running of the bulls as the IMF (International Monetary Fund) projects that Spain's unemployment rate stays above 25% for the next five years.

US ECONOMY: Not too hot, for sure; not too cold, probably; so here we are, back in Goldilocks territory, though it has more of an Alice in Wonderland feel to it.

INVESTOR SENTIMENT: Massive equity inflows in July. The rocket is now ten feet above the ground. Will it escape the negative sentiment gravity of the last five years?

HOUSING CRISIS: Better and better, but still seeing a forest of For Sale signs on the lawns of the second-home landscape.

EUROPEAN ECONOMY: You go from zero to hero if you put up a positive GDP number for the second half of 2013.

VOLATILITY: Licking its inanimate chops as we move into a low/no news period.

Lloyd: How did your systems hold up during the heat wave?
HAL: Thank you for calling; all of our operators are busy right now. For English, press 1; Para atención en Español, presione 2. To renew your prescription, enter your twelve-digit code.
Lloyd: Got it.

CHINA: Seems to have drawn a 7.5% GDP growth line in the sand. Let's hope the sands don't shift downward.

GLOBAL ECONOMY: Introducing a new and old saw: "The seven most dangerous words in economics -- growth will improve in the second half."

JAPAN: Sales tax increase coming... unless it doesn't, of course. Decisions, decisions...

SEQUESTRATION: Working on a new superhero comic book: Congress vs. Sequestration! Please leave fill-in preferences for hero and villain in the comment section below.

BONDS: About to take the path from financial market darling to financial market dog. And it's a long and increasingly lonely walk at that.

TECHNICALS: Rotation out of stocks you own and into stocks you've sold continues.

CENTRAL BANKS: Australia puts up its "Will Work for Less" sign as it cuts interest rates to weaken its currency.

THE NIKKEI: "Up is up, and down is down..."

SHIBOR: "Down goes Shibor! Down goes Shibor!"

BRAZIL: Disputing the IMF's method of figuring its country debt to GDP is at 68%, preferring to uncover a number that is less than that, anything less than that.

SPAIN: Tragic train crash adds injury to insult.

OIL PRICES: Holding at seemingly elevated levels -- so either the global economy is improving, risks of war-related supply disruptions are rising, or both... or neither. The Wall is always glad to be of service, ma'am.

EARNINGS SEASON: Almost over, and just in time, as pre-announcement season starts soon.

TERRORISM: So much for carefree travel this August.

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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