Stocks are soaring this afternoon after the Federal Reserve announced it is seeing a “somewhat slower” slide in the economy and left interest rates at a record low level.

At 2:37 pm ET, the Russell 2000 (NYSE:IWM) is up 4.53% at 494.26, while the Dow is up nearly 3% and the S&P 500 is up 3.05%.

On the data front this morning, the Commerce Department reported that the U.S. economy contracted at a steeper-than-expected pace in the first quarter, weighed down by sharp declines in exports and business inventories. The news did little to quell positive investor sentiment after the Fed left interest rates untouched.

Small caps flying high today include Town Sports International Holdings (Nasdaq:CLUB), up 35.5% on heavier-than-average volume, while Encore Capital Group (Nasdaq:ECPG) is up 36% after reporting a rise in Q1 profits.

*****We’ve reached the stage of this rally where bad is good. It started innocently enough in early March when Citigroup (NYSE:C) shocked the world by saying it was making money. A few earnings surprises have helped it along. But now, good news is running out, and to fill the void, investors are saying that bad news is actually good.

I don’t know how many of you have learned your lesson by uttering the phrase “It can’t get any worse.” I have. It seems that those five words have the power to conjure ancient gods that are full of wrath. Such is their displeasure with man that they will, rest assured, make certain that things do, indeed, get worse.

I now fear these gods are being awakened. Because there’s no way to explain the rally for stocks in the face of poor forward earnings guidance, continued weakness in home prices, and worse than expected GDP unless investors are saying that “It can’t get any worse.”

Repent, I beg you. Cast off your hubris before we get some serious gnashing of teeth.

*****Case in point: oil prices. Crude prices continue to remain strong despite falling demand and growing inventories. Of course, we all know that prices will rise eventually (and SmallCapInvestor PRO members have made good money on this expectation by buying small oil exploration companies). But timing is an issue.

Right now, oil is sitting in tankers because traders are convinced that the . . .

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