Investors are itching to get the results of the much talked about financial stress test. Aside from a few well-engineered leaks, there’s been little indication of the overall results.

It is probably fair to assume that information pertaining to worse than expected results would be kept within the confines of the regulatory body and the respective bank(s), while morsels of good news will be emphasized.

As we’ve found out, just the perception that a bank isn’t safe can create a run on the bank. Such a run on the bank (defined as too many customers withdrawing their money at the same time) is exactly what “killed” Washington Mutual. Regardless of the results, we can be sure that the government will do what it takes to avoid a run on any of the banks undergoing the stress test.

Stocks started their rally before there was any talk of a financial stress test and should continue their rally beyond the unveiling of the test results. The rally is not caused by the stress test or bank rescue plan. The rally is taking place despite the government’s attempts to prop up the system.

Case in point, the market continued to inch up despite news that Bank of America (NYSE: BAC) might need an additional $40 billion in capital.

If the stock market starts to fall again (more about whether this rally is doomed to fail in a moment), it will not be because the stress test or bank rescue plan broke the camel’s back, – the camel’s back has already been broken. How so?

To properly assess the economic situation, it is paramount to comprehend the extent of the problem and how the stock market as a whole behaves.

The extent of the problem

It is easy to get desensitized about the real value of money when you consistently read about billion and trillion dollar bailouts or deficits. How much is a trillion dollars? A trillion dollars denominated in $100 bills and laid out on a football field would stack to a height of over 80 feet. In other words, if you had spent $1,000,000 every day since Jesus was born, you would only have spent about 75% of one trillion.

While the 1940 – 1970 bull market was built on sweat and hard work, the 1980 – 2000 bull market was financially engineered. The U.S. economy morphed from a manufacturing powerhouse into a financial powerhouse.

An intricate web of financial tools and instruments were the final result of this financial powerhouse. It will take years to unravel this web. How big is this web or financial house of cards?

If you think one, two or three trillion dollars is a lot of money, consider this: Credit Default Swaps (CDSs), according to some estimates, are valued at $50 trillion. CDSs are one of the riskiest investments ever invented. CDSs were often sold/bought as an insurance against toxic assets. Companies that sold them include AIG (NYSE: AIG) and Berkshire Hathaway (NYSE: BRK-A).

Already in 2008, the ETF Profit Strategy Newsletter identified Credit Default Swaps as a ticking time-bomb and the financial sector as a “downward spiral with no stop-loss provision.” The Financial Select Sector SPDRs (NYSEArca: XLF) and SPDR KB Bank ETF (NYSEArca: KBE) have certainly blown up since this assessment.

Despite all the good news as of late, the problem is simply too big to be solved by $700 billion or $1 trillion initiatives. There’s just not enough lipstick to put on this pig.

What drives the market?

You might look at a solar powered instrument and conclude that the solar panel is the power source. This sounds logic but in reality the solar panel’s power production is subject to larger forces - the sun.

Similarly you may look at stocks and conclude that their composite performance is news driven when ultimately their performance is subject to larger forces – supply and demand.

ETFguide has been telling subscribers not to buy the news. In general, news and events don’t drive the market. Unfortunately, Wall Street’s analysis is mainly news-based and merely follows the trend.

According to CNBC, Citigroup’s (NYSE: C) chief U.S. equities strategist said, that “the investment community is almost shocked by the near 30% rise in the S&P (NYSEArca: SPY) since early March.” The news surrounding the March low painted a doomsday scenario. Yet, the market rallied and news based forecasts were once again proven wrong.

Already back in December 2008, the ETF Profit Strategy Newsletter alerted subscribers that a market bottom will be followed by the biggest rally since October 2007. In January, Dow 6,000 to Dow 6,700 was given as a target range for the bottom. On March 2nd, a Trend Change Alert along with ETF recommendations was sent out.

The results of the bank stress test will just be another event. In all fairness it has to be said that certain news events can dictate the market’s action for a day or two, but eventually they are no more than water under the bridge.
Water under the bridge

For the first time since the early 1960s, the Federal Reserve announced to buy U.S. Treasuries. No single news event could have more bullish implications for U.S. Treasuries and gold or more bearish implications for the greenback.

The logical reasoning is that the Federal Reserve will be printing up to $1.2 trillion worth of new dollars to buy U.S. bonds thereby devaluing the current U.S. dollars in circulation. Gold is the best protection against such inflationary forces.

After an initial spike however, investors were dumfounded as gold, silver, and U.S. Treasury prices continued to fall while the U.S. dollar continued to rise. Logic based on news does not work.

Investments in the SPDR Gold Shares (NYSEArca: GLD), iShares Silver Trust (NYSEArca: SLV) and iShares Barclays 20+ Year Treasury ETF (NYSEArca: TLT) have proven to be a bitter disappointment. The PowerShares DB Dollar Bullish ETF (NYSEArca: UUP) on the other hand has surprised everyone who based their decisions merely on news.

What’s next?

Following the announcement of the stress test results on Thursday afternoon, the stock market may rally or dive on Friday. Investors willing to learn from history, however, will not base their investment decisions on Thursday’s news but take a moment to consult indicators with a track record of accuracy.

Unlike news, which tends to be good when the market reaches a top and bad towards the bottom, investor sentiment - a contrarian indicator - can be of value when it comes to detecting a market top.

We used extreme optimistic sentiment seen in early January as an indication to load up on short ETFs such as the UltraShort S&P 500 ProShares (NYSEArca: SDS) and UltraShort Financial ProShares (NYSEArca: SKF). In fact, investor’s optimism in January rivaled the extreme readings recorded days before the market’s all-time high in October 2007.

Conversely, extreme pessimism (along with other indicators) can be indicative of a market bottom. This caused us to send the above mentioned Trend Change Alert on March 2nd.

To pinpoint a range for the ultimate market bottom, it takes more than just sentiment readings. Fundamental indicators such as P/E ratios, dividend yields, and the Dow Jones measured in gold have an outstanding track record of accuracy.

A study of historic bear market bottoms shows that P/E ratios and dividend yields always reach a certain level before the market is able to bottom. Just like the body is not healthy until it cools down to 98.6 degrees, the market is not “healthy” unless P/E ratios and dividend yields clock in at a certain level.

The March issue of the ETF Profit Strategy Newsletter includes a detailed analysis of the above mentioned indicators along with target levels for the ultimate market bottom. This is not the type of information you’ll find in your everyday news, but as we’ve learned, news is a lousy indicator anyway.