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  • The Optimism Continues

    By Rev Shark
    RealMoney.com Contributor
    4/20/2006 9:11 AM EDT

    "The greatest lesson in life is to know that even fools are right sometimes."

    -- Sir Winston Churchill
      
     
    As we contemplate the state of the market this morning, two facts are painfully obvious: interest rates, energy and commodity prices are at extremely high levels, and the major indices are all close to multiyear highs.

    Those two facts seem to be contradictory. How can the market continue to go up when the cost to borrow money is increasing and the cost to buy energy and basic commodities is at record highs? Don't those things hurt profitability and slow economic growth? There are two possibilities: Market participants have already priced in those problems and are looking beyond them or market participants are stupid and are soon going to learn a hard lesson.

    The truth is probably a combination of the two. The discounting machinery of the market is not perfect. In fact, it is really quite poor at times -- it is highly dependent on emotion and can change in a heartbeat. On the other hand the market does tend to do a fairly good job about giving an advance warning when things are turning. When the technical action deteriorates and stocks struggle, we will know that it is time to stand aside and let the market-discounting mechanism reflect whatever the new mood might be.

    The biggest mistake you can make right now is to not be accepting of the positive action that is in front of you. The inclination of many is to conclude that only fools and morons are buying when the macroeconomic issues are so painfully evident. Maybe so but sometimes the fools are right and you can go broke trying to battle them.

    Don't be too quick to assume that the foolishly overoptimistic bulls are going to be slammed at any moment. The greater likelihood is that the market will continue to hold up relatively well for a while and slowly suck in the nonbelievers on the sidelines. Fighting momentum is a very tough way to make money in the market.

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