In several recent posts,  "The Delusion May Be Greater than First Thought," "Brain Damage?" and "Bipolar Disorder?" I questioned what equity investors were thinking when they repeatedly bid share prices higher after the release of each new bit of bad news.

To be sure, it often makes great sense buying depressed securities when it appears that all the negatives have been fully factored in.

Nonetheless, the fact that each day brings fresh and unexpected revelations about an ever-widening circle of fallout from the collapse of one of history's greatest credit bubbles while indices have consistently remained within earshot of their all-time highs suggests that recent developments are not quite what Rothschild had in mind when he said that the time to buy is when there is "blood running in the streets."

In "Bad-News Bulls," The Economist is similarly sceptical of recent events.

Stockmarkets are breaking records again as if the credit crisis were ancient history. If only it were

The news seems to go from bad to worse. In late September figures showed that the American housing market was in free fall, with both sales and prices plunging. On October 1st Citigroup and UBS, two of the world's biggest banks, said they were writing down $9.3 billion of debt between them because of the credit crunch.

Global stockmarkets have reacted not with dismay but with euphoria. Wall Street marked the Citigroup write-downs by driving the Dow Jones Industrial Average to a record high (see chart). The MSCI emerging-markets index has soared to new highs. This summer's turmoil seems to have been completely forgotten.

What explains this apparent insouciance? It seems that investors reckon they cannot lose. “Take your pick,” says Gerard Minack, a strategist at Morgan Stanley: “Equity markets are either behaving as if the worst is over for credit and housing problems or they remain convinced that the [Federal Reserve] can offset whatever bad news may unfold.” In other words, bad economic news means the Fed will cut interest rates and good news means recession will be avoided.

There are some signs to support the idea that the worst might be over in the credit markets.