On the Front Lines of Rationalization - TheStreet







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Last night, the markets saw a good deal of motion. At one point, for example, the S&P futures were up 1.5%, though by the time our market got around to opening, the gain had been cut to about one-third of that. Aside from a pretty nasty selloff, followed by a bit of a ramp job, the market basically spent the first couple hours flopping and chopping in a wide range, with the indices modestly red. It's worth noting that in the early going, housing stocks were down just slightly on the back of this morning's disappointing number for housing starts.

In-the-Running Bulls: The wide-ranging flop-and-chop continued all day long, though there was a pretty decent surge at the end of the day, which took the market out at its best level of the day. A check of the box scores shows that, of all things, the SOX was the leader, but the biotechs were pretty frisky as well. Before the open this morning, I thought there might be a chance for the market to come in after the big moves we have had, and the fact that the war news is now on the table, but that did not occur. Perhaps there are a lot of buyers lurking around. In any case, if one thought the near-term direction of the market was going to continue to be up, today's performance could be deemed fairly credible.

Away from stocks, most of the action was in the oil market, with nearby crude down more than $3 a barrel. The precious metals were slightly higher, while the 10-year note was down a half-point. It's interesting to note that the war trades for all these outside markets have evolved at different paces. First, gold collapsed. Then, coincident with the stock market rally, the dollar started to rally. Oil has been the last piece of the war trade, cracking hard yesterday and today.

Buy the Blemish

: Things were looking more resilient in tech land, despite last night's bad news from


( GTW),

Tech Data

(TECD) - Get Report


Applied Materials

(AMAT) - Get Report

. Tech Data, the second-largest distributor of technology products behind

Ingram Micro


, preannounced for next quarter, but folks just shrugged that off. In fact, the stock was up nearly 10% at one point today. Likewise, Applied Materials was up in the early going, even as it followed up its preannouncement from a month ago with the news that some 15% of its employees would no longer be material to its workforce.

That bad news doesn't matter right now is one ingredient of what I expected to see during the war rally period. People who are still in denial about our real problems will turn war angst into an all-purpose scapegoat, a rationalization to go out and buy stocks. So, with the excuses already being made up and believed, it was perfectly "logical" why Tech Data and Applied Materials were able to overcome bad news. That said, we don't know yet how much bad news will continue to be ignored on the back of war angst, which is why trying to gauge how far this rally will go is not possible at this point.

Active Duty for Denial

: Similarly, we don't know if there is going to be a lot of good news emanating from the war. If the war goes as swiftly as some people expect, Bush will look better. His platform to push for the tax cut, which many people consider bullish, will be bolstered. People will talk about oil getting crushed as a tax cut. Then, of course, all the technicians will be chirping about how we've successfully tested the lows, etc., etc. At this juncture, it is not possible to gauge the amount of bullish spin that good news on the war front could produce. But in the meantime, people who want to rationalize away our problems will find plenty of ammunition.

I bring all these examples up now so that people can assess them before momentum gathers further, and to know that it was possible to see this coming. Even though I am in the mode where I am not short and I'm willing to give the bulls plenty of rope, I still have to shake my head at the amount of denial and lack of understanding that exists three years after the peak of the biggest bubble in the history of the world.

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William Fleckenstein is the president of Fleckenstein Capital, which manages a hedge fund based in Seattle. Outside contributing columnists for TheStreet.com and RealMoney, including Mr. Fleckenstein, may, from time to time, write about securities in which they have a position. In such cases, appropriate disclosure is made. At time of publication, Fleckenstein Capital had no position in stocks mentioned, although positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Mr. Fleckenstein's columns are his own and not necessarily those of TheStreet.com. While Mr. Fleckenstein cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to