I keep reading stories skeptical of this stock market rally. CNBC has been calling it the “most hated rally in history” and asking questions like “is the market rally just a set-up for a bigger ‘collapse’?”. Individual investors continue pay them heed and pull money out of the market. Amazingly, after a 1,000 point rally in the Dow Industrials over the past months I still see more “fear” than “greed” out there right now.

Prices are clearly feeding on this skepticism and disdain. The market didn’t have a huge rally last week but the Dow did manage to tack on another 100 points. All things considered, it looks to be consolidating the gains of the past month in a healthy way. What I mean by this is that prices are holding fairly steady rather than immediately giving back their gains and investors show no signs of greed or giddiness in response.

That’s not to say we won’t see at least a pullback. A healthy consolidation would ideally entail a pullback to the 1375 area of the S&P 500 (see “Reading the Tea Leaves”). But I believe that any weakness, at this point, will be bought by those same investors that have been too fearful up until this point. Rallies begin with the fear of losing but are sustained and rejuvenated by the fear of missing out.

One of the fundamental drivers of the rally may be the recovery in the housing market. The persistent weakness in housing over the past few years could arguably be the most significant contributing factor to our prolonged economic malaise. Now that housing is showing signs of rising from the ashes it represents a large potential boost to an economy that has been threatening recession.

Foreclosure activity has declined dramatically. Prices are very cheap relative to rent and have started rising due to much improved supply and demand dynamics not to mention ultra-low mortgage rates. If Washington can get their act together to ameliorate the “fiscal cliff,” it looks to me like the groundwork may be in place for a small economic boom driven by this housing rebound.

An “echo bubble” certainly would rhyme with the history of other bubbles and busts. It would also setup another episode of greed-driven markets that would give intelligent investors a clear signal the rally that began in 2009 may finally be coming to an end. But I’m getting way ahead of myself. For now, investors are happy to trash stocks and I’m happy to hold them. Still, I’m keeping my finger in the wind.

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