Wednesday, May 30, 2007

All You Need to Know About Wall Street Rally

So Wall Street ignored the sell-off in China's stock market. Quite rational since there aren't any good reasons why it should have a significant effect. Yet not only did Wall Street not sell off, it actually soared. Why? Because Fed minutes expressed confidence that the U.S. economy would turn around in the second half of this year. Huh?

That is not only not a rational response, it is a highly irrational response. First of all, regardless of whether you agree with the Fed's view or not, the mere fact that the Fed expresses this view without even putting forth any arguments does not make it more likely or the case for it more persuasive.

Indeed, given the fact that this will further reduce the already non-existent chanse of a rate cut and in fact increase the odds of a rate increase (especially since the Fed expressed concern about inflation), the rational Wall Street response argument would be to sell off, not rally.

When the market is in such a mood, nothing is going to stop stock prices from rising. So as long as this sentiment continues, I am bullish on the U.S. stock market. The only problem is of course to pinpoint when the bullish sentiment ends, because previous similar "all news is good news"-episodes sure haven't lasted forever.


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