“The market is discounting the turn in the economy.” Isn’t that a common refrain these days? Every time I turn around, someone on bubblevision or in the blogosphere tells me the reason the market is going up is that it is a leading indicator and portends better days ahead. There has been an overwhelming panic buy-in since the S&P 500 gapped up around 910 in mid July.

The problem is that investor buying has begotten more buying, and the tape is not matching the fundamentals. If the only reason you are buying is that the herd is telling you the market leads the economy, then why was the S&P 500 at 1575 in October 2007? That’s where the debate should begin and end.

The question is: how well was the market discounting the next 6-12 months back in Q4 2007? Not so well! The same may be true today. The next question is: What about market efficiency? The previous example proves the point.

Take any market…traders like to cite China and the Shanghai Index breathlessly these days, especially on the heels of a 100% surge this year alone. But look farther back. The Shanghai Composite Index traded to 6100 in late 2007. It crated below 1700 last year. Today it is around 2900, after nearly reaching 3500 two weeks ago! Hello discounting market, hello efficiencies!!

The point of my rant is that the panic chase to buy stocks since mid-July and the level of bullishness are good reasons to fret. The next time someone tells you how the market reflects future information, I’d caution you as to the reliability of such a notion. Stocks move on perception as well as reality.

Sometimes perception is all that matters, until reality takes hold. Right now the spin-doctors hope you rely on perception, in the sense that you must own stocks because the economy is getting better and the great recession ended three weeks ago! How many times have you heard that in the past seven days?!

The recession may have indeed ended last month, but what happens if or when the economy pulls a W rather than a V? The market is as much a casino as ever before, and you better not rely on certain viewpoints without thinking through the pros and cons before taking a position.

Frankly, the manic tendencies our market has faced these past two years (and likely well into the future) will dictate attention to a mixed type of portfolio. It would contain loads of cash, a few targeted equity and fixed income securities, and a whole lot of patience. Perception may not be reality, but as Warren Buffett likes to say, the market votes in the short run and weighs in the long run. I plan to thrive in the long run and will manage accordingly.