Choose Rubber

Story Highlights:

• In the last month, stocks have endured a barrage of bad news, from North Korea's nuclear tests to stark GDP reports to a big auto bankruptcy.
• Yet, for all that trouble, markets largely continued the huge rally begun in March—as it's said, bull markets climb a wall of worry.
• If stocks retest recent lows, the "sucker's rally" would rank number two all-time. Not out of the realm of possibility, but less likely the longer the rally is sustained and the higher it goes.

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Sticks and stones may break bones, but words? Words bait bull markets. Stocks have endured a barrage of bad news in the last month. Here's a sampling (in no particular order):

• North Korea tested three short-range missiles and a nuclear weapon
• Swine flu spread from Mexico around the world
• Chrysler filed for Chapter 11 bankruptcy
• Chrysler announced hundreds of dealership closures—so did GM
• The unemployment rate rose to 8.9%
• Retail sales came in weaker than expected for April
• Preliminary Q1 US GDP declined a more-than-expected -6.1%
• Q1 Eurozone GDP lost -10% annualized
• Japan and German GDP fell -15.2% and -14.4% annualized
• S&P issued a negative UK outlook and raised concerns it could lose its AAA credit status
• The FDIC took over and sold BankUnited in the largest bank failure this year
• March home prices continued falling year-over-year
• Smaller banks showed signs of stress

Yet, for all that trouble, markets largely continued the huge rally begun in March (outside a minor one-week pullback). How can that be? You've probably heard the old saw: Bull markets climb a wall of worry. Bad news is the mortar holding that wall together—and we've seen plenty. There'll likely be more to come. But stocks don't care about what's just happened—that's old news, already reflected in prices. Markets shade future probabilities. That means, although the here and now can be nasty, prices may climb higher still on the notion a recovery awaits. And it's not just in theory: Despite all the recent negativity, amply demonstrated above, stocks have surged faster and stronger from the March bottom than most investors have ever seen.

There's always the chance we're witnessing a massive bear market rally. Some unforeseen development could yet tank the recovery. But if markets retest recent lows, the "sucker's rally" would rank number two biggest of all-time.* Not out of the realm of possibility, but less likely the longer the rally is sustained and the higher it goes. And as the big stories (economic woes, auto woes, banking woes, housing woes) keep recycling, stocks have a better chance of maintaining their upward momentum.

Keep an eye out for those sticks and stones—but as the bevy of bad words barrels on, choose rubber, not glue. You can be sure markets will too.

* Based on the S&P 500 Index. Source: Global Financial Data