Market Update: Steady as She Goes...

The current state of the stock market reminds me of a story told by the celebrated 19th century writer and humorist Mark Twain.

Keep in mind, Twain was a great writer. But he was a terrible investor. So he knew something about the mindset of investing and speculating, and how our brains play tricks on us.

So the story goes that an old gold prospector dies, and ascends to the gates of heaven. The only problem? There's a big line of other miners in front of him, all waiting their chance to talk to St. Peter so they can pass through the pearly gates.

So the old miner, impatient at waiting, has an idea. He yells "Gold! Gold discovered in Hell!"

Hearing this, the crowd of miners lets out a roar of excitement, and runs down the dark path to the netherworld, leaving the old prospector alone with St. Peter.

Having watched all this, the guardian at the gates is quite impressed.

"Are you ready to join us?" asks St. Peter with a sweep of his hand.

But the old prospector rubs his beard, suddenly reluctant.

"No," he says. "Maybe I'll go and join the others," as he watches the last of the crowd of miners disappear into the blackness.

"There might be some truth to that rumor after all."

Twain's point, in a roundabout way, is the power of an investor's mind to make himself/herself believe almost anything - if the crowd is cheering things on with enough enthusiasm.

And with that in mind - suddenly there's boatloads of enthusiasm for the stock market in the past week. This was the headline in the Wall Street Journal:

Like the old prospector in Mark Twain's story, I find myself thinking "Hmmmm, maybe there's something to this 'new bull market' stuff."

Certainly, our goodBUYs portfolio is showing plenty of gains lately, far outpacing our benchmark. We had one stock on Friday that rose nearly 40% in a day! (More on that below for premium subscribers).

So it's easy to convince oneself to throw caution to the wind and join the cheering crowd. Except that the Federal Reserve has been raising interest rates - and it isn't through raising them yet.

According to Fed members' speeches and published reports, there seems to be consensus to raise interest rates from the current 2.25% rate now, all the way up to 3.5 or 4% by the end of next year.

Both consumers and corporations are dealing with the impact of high prices, and a potential recession in coming months. US companies are starting to announce layoffs, even though the overall US employment picture still remains pretty good.

So maybe we'll just sort of muddle through it, right?

Sure, maybe. But we can't lose sight of the risks as the crowd cheers on the rally. Sharp quick rallies of 15%, 20%, 30%, 40% - even 50% - are hallmarks of bear market behavior. Here's one from 2001 - a 54% gain in less than 2 months:

Yet how puny that 54% gain seems (the pink box in the chart below) as the bear market showed its fangs over the next year and a half.

So I'm not going to belabor the point much beyond this. Enjoy the rally. I think it's clear sailing all the way to Labor Day, as I've been saying for a number of weeks now.

And maybe we really will look back on this as the start of something special for the stock market, for all I know. We always need to respect what the market (and its cheering crowd) might be telling us.

Then again, the cheering of the crowd tends to lead to mass delusion. We always have to approach the market with our eyes wide open to rewards and risks.

Portfolio Review

One of our portfolio stocks experienced a 39%% one-day gain on Friday...