The Great American Wall Of Worry – US Stock Market

Courtesy of Chris Vermeulen of Technical Traders

Naturally, traders and investors are having trouble climbing over the wall of worry that the US stock market has been climbing, and rightly so. A lot of things are unfolding that carry a high level of uncertainty. Let’s face it, who wants to invest money in the market when it’s hard to formulate a good reason? There's high unemployment, banks being extremely tight with their money, and companies refusing to hire new staff.

The hard pill to swallow is the fact that the stock market loves to rise when uncertainty is high. It almost does it just to drive investors nuts, especially those who sold near a market bottom or recent correction.

To invest, we need to overcome that strong urge to short the market when the economy looks so bearish going forward. We need to resist the temptation to follow our logical conclusions and continue to trade the trend in spite of fear and disbelief. Markets love to climb the worry-wall and laugh at the logical investors who decide to be one step ahead with a scary array of bearish positions, on margin. 

Short Term Investing – Weekly Volatility Index Chart

The fear index is below. The chart is self-explanatory showing where it should move next. But if you are not familiar with the VIX then here is the definition by investopedia:

“The first VIX, introduced by the CBOE in 1993, was a weighted measure of the implied volatility of eight S&P 100 at-the-money put and call options. Ten years later, it expanded to use options based on a broader index, the S&P 500, which allows for a more accurate view of investors’ expectations on future market volatility. VIX values greater than 30 are generally associated with a large amount of volatility as a result of investor fear or uncertainty, while values below 20 generally correspond to less stressful, even complacent, times in the markets.”

Weekly Investing Chart of the SP500 Index

After reviewing the VIX chart above which points to stocks nearing a level of selling pressure and reviewing the chart below, I conclude that a minor pullback of 2-5% is likely to take place in the next week or two.

The divergence in the Relative Strength Index is a bearish sign for the broad market. While I think a pullback is due and needed for the market to regroup, it is important to review the seasonality chart. The seasonality charts suggests the stock market is entering one the strongest periods of the year.

SP500 Seasonality Chart

The data from the previous two charts and the graph below clearly show that a pullback in stocks will likely be bought back up by brave investors willing to override their fear and go with the trend. 

[Check out my stock chartlists: https://stockcharts.com/public/1992897]

The Wall Of Worry Conclusion:

In short, expect the stock market to correct in the next week or two. But once we get a correction of two percent or more, be prepared for buyers to step back in and buy things into year end.

This WALL OF WORRY is about to GET HIGHER!

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Chris Vermeulen