Taking Account of What's Priced In
By Rev Shark
RealMoney.com Contributor
4/18/2006 9:04 AM EDT
"The future is here. It's just not widely distributed yet."
-- William Gibson
The negatives plaguing this market are painfully obvious to even the casual observer. Oil is over the $70-per-barrel mark, the Federal Reserve keeps talking about inflationary pressures, interest rates are inching up, real estate sales have cooled and the market hasn't had a notable correction in many months. How can anyone possibly be positive about the market with so many major issues confronting us?
I don't know the answer nor do I think it's necessary to answer it. We simply have to focus on the details of the action in front of us and react as it unfolds. The market is a discounting mechanism -- when everyone is aware of an event it tends to be priced into the market. If we know that if a company is likely to have a poor earnings report the market doesn't wait until the numbers actually are released; it prices in the news immediately.
It is the same with macroeconomic issues. If the market suspects that the FOMC will raise rates to 5.25% it doesn't wait until it actually happens. It prices that expectation in right now. That discounting of future events is probably one of the reasons that the market continues to hold up fairly well. The problems are well known to us all and are already factored in to some degree.
The bears' primary argument is that the market has done a poor job of discounting the future. We may know what the problems are but we are either ignoring them or haven't priced them in adequately. Maybe that is true but there is no way to know for sure. The best approach is to let the market answer that for us.
If we continue to hold up as oil prices skyrocket and interest rates explode higher, the only logical conclusion is that the market is already anticipating those things. Maybe it will reevaluate that thinking at some point but until we see some price action that reflects those obvious problems, trying to anticipate their effect is a tough game.
I noted yesterday that I continue to see plenty of positive price action in individual stocks. The IBD 100, for example, was up 1% yesterday although the broader market indices looked weak. There is money sloshing around looking for a place to go and that is why a fair amount of stocks continue to sport technically positive charts.
Today marks the real start of earnings season and that should help give us some insight into the mood of the market. The reaction to reports, good and bad, is going to tell us a lot about the market. If buyers are attracted by positive numbers and forget oil and interest rates, we will be in good shape. But if we start seeing some sell the news reactions to solid reports we will be in trouble.
PPI and housing starts are out, and they're soft. That is dampening inflationary fears and boosting the market. We have a solid start shaping up. Overseas markets were generally positive as oils, metals and mining continue to lead. Be ready for a barrage of earnings after the close tonight. Also we have the minutes of the last FOMC meeting this afternoon which may cause a jiggle or two as well.