Why are these markets getting used to bad news now?

MichaelShulman answered 10 months ago …

The bias to the upside comes as the new president pushes his $900-billion stimulus package and offers tough talk on saving the banks with our money. Not to mention, some (actually lousy) earnings reports arrived better than expected, and the very tentative ceasefire in Gaza has offered a little more security.

But bad news continues to surface:

• Housing prices fell almost 19%, year-over-year.
• Homebuilder and business confidence are at all-time lows.
• There were approximately 100,000 layoffs at major companies in the past week or so.
• Britain is on the verge of nationalizing its big banks.
• Iceland is broke, and Ireland may soon follow suit.

And more of this kind of news is coming. The market already assumes that there will be bad earnings and bad economic news in the next two quarters -- and that the bad news is already built into stock prices, but they'll be in for a surprise because it's not all factored in.

The market will continue to trade in a range from Dow 7,950 to 8,400, as short-term catalysts, like the passage of the stimulus package and the final government proposal for the "bad bank," hit the market. The major indices could break out either way due to internal momentum -- up to 8,600 to 8,700 on the upside, or down to 7,000 to 7,350 on the downside.

The upside move has no technical support except momentum, while the downside move is considered by many analysts as a prelude to the 6,000 to 6,600 level.

For these reasons, despite the market's overall willful optimism, I'm still biased toward the downside.