My introduction to the world of finance and investing came back in the late 1980s when I went to work for a nationally known investment guru named Howard Ruff. At that time, Howard was big stuff. His newsletter, the Ruff Times, had about 300,000 subscribers and had the widest circulation any investment newsletter had ever experienced at that time.

Howard wrote a best-selling book called How to Prosper During the Coming Bad Years. For those who might not remember, the 1980s was a decade of economic disarray and disaster. Howard warned people about what he saw as a risky stock market and advised investors to buy hard assets–specifically gold. In 1987 the market crashed and the price of gold climbed to more than $800 an ounce. People who followed Howard’s advice made handsome returns. A few who bet the farm became extremely wealthy.

For a time, Howard was hailed as a financial prophet. But Howard’s message never really changed. He was always warning followers that another disaster was right around the corner. When the 1990s came along and brought unexpected prosperity and market profits, those dire warnings sounded hollow. Howard and his defensive strategies faded into oblivion as investors got wealthy by investing in high risk technology stocks that no one had ever heard of.

This is relevant today because there is always some analyst or economist predicting that the next market downturn is right around the corner. And any time a bull market persists for more than a few months, those warnings get louder and more frequent. Eventually a correction will occur and all those forecasters of doom will feel vindicated.

We’ve now seen major stock indices move sideways for about eight weeks. The failure of the indices to continue to advance has caused many to worry about the possibility of a serious correction. That is the glass half empty view.

The glass half full view is that stocks remain in a bull market and this recent action is nothing more than a normal consolidation period. During powerful bull market advances, stocks tend to advance in a stair-step pattern. After a steep rise there will be a sideways period while stocks rebuild momentum for the next step. It is quite possible that we are currently experiencing this type of pattern. While it is still possible that the market could turn down sharply, the fact that it has continued a sideways pattern for this many weeks should probably be viewed as a sign that underlying market strength is good.

Here is some more ammunition for market optimists. Since its inception in 1926, the S&P 500 has produced 56 years with positive returns compared to only 23 losing years. The average annual gain of those positive years was 22.7%. The average annual loss during the negative years was 12.6%. In other words, there are twice as many positive years as negative. Over all 79 years, the resulting average annual gain has been about 12%.

As I’ve noted repeatedly in recent weeks, while many investors and analysts have a feeling that the market might be overdue for a correction, economic and market fundamentals remain strong and contrary to those intuitions. And when it comes to deciding what the markets are likely to do, I’ll vote with tools over intuition every time.

In his weekly Changewave column, Tobin Smith also takes issue with market pessimists and describes the current market as a “raging bull.” While Tobin is often too optimistic for my taste, I agree with many of his arguments for a continued market rally. Here are a few of his conclusions:

• “The slowdown from the rate hikes of 2003 through mid-2006 is over.
• The … correction we had in the May-June 2006 sell-off was the correction the market needed. Those who say we have not had a 10%-ish correction for three years must have been on vacation.
• The ‘collapse of the sub-prime mortgage’ theorists who call for a housing market meltdown taking the U.S. economy into a recession have a lot of explaining to do.
• Economic expansion and job growth will take the U.S. deficit below $150 billion for fiscal 2007 — less than 1.3% of nominal GDP. That’s NOTHING compared to the rest of the G-7 countries (ex-Canada with its energy-driven surplus).
• Housing construction gains in 2008-’09 will carry U.S. economic expansion into 2010 — unless the Democrats get crazy with their economic populism and pass anti-global trade laws that feed protectionist paranoia.”

To these I would add that inflation and unemployment remain at historically low levels. GDP just came in stronger that expected. Oil prices appear to be achieving some stability. Consumer spending remains strong. Corporate earnings keep coming in ahead of expectations.

These are not generally the signs of a market on the brink of collapse.

F.S.