Bad Vibes Help Support the Market
By Rev Shark
RealMoney.com Contributor
4/10/2006 9:02 AM EDT
"It is far harder to kill a phantom than a reality."
-- Virginia Woolf
The market is a discounting mechanism -- it is constantly pricing in and adjusting for future news. The fact that the market doesn't always do a very good job of predicting the future and/or price in its impact is what creates great opportunities for astute investors and traders.
Right now the market is primarily focused on the effect of higher interest rates. Although higher rates have been anticipated for a while the reality is finally kicking in and that is having an impact. Although the increases aren't particularly surprising, so far the phantom that is lurking is the possibility that the market has not done a good job of predicting how high rates may go and may not have fully priced that in.
It is often said that the market hates uncertainty. Anyone who understands human nature can understand why that is the case. The unknowable and uncertain future always has the potential to be worse than we think. We can deal with the reality that is in front of us but we can't deal with the future that has yet to unfold.
And that is the dilemma of this market. Interest rates are rising and we don't know how high they will go or to what degree the market has already priced them in. The irony of this is that the more worried investors are about the future of rates the more quickly they discount their impact. When rates are widely believed to be an issue then we can take some comfort in the fact that many investors are probably expecting the worst and are acting accordingly.
This concern about the future helps create the proverbial "wall of worry." Investors expect the worst so they stand aside but when they see their fears are not coming to fruition they slowly inch into the market in fear of being left out. As long as skepticism and doubt remain high, we can be fairly certain that there is cash on the sidelines looking for a place to go. If the market is slowly going up that cash will most likely flow into the market over time.