The news flow of late hitting the market has been anything but bullish. Lousy economic reports. Weak corporate earnings. Predictions of poor profits going forward.

In an environment of bad news, it is easy for an investor to react to the news in a knee-jerk fashion.

However, reacting to the news is like driving your car using the rearview mirror. Indeed, the trick to successful investing is not so much reacting to what has happened but predicting what will happen.

I think the best way to use the news is as an indicator of how much the market is discounting bad news. That is, what is most important is not the news itself, but how the market reacts to news. If the market declines on bad news, it indicates that clearly the market is not fully discounting all negative news. That's critical. Indeed, you won't have a market bottom until all the bad news is reflected in stocks. We are not at that point yet, as every negative news event seems to fuel more selling.

On the other hand, when the market starts to hold up in the face of bad economic and earnings news, it means a bottom is being laid. That's what I'm looking for right now - a market that holds up in the face of bad news. Once that happens, I'll become a bit more optimistic about stocks.

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