We learn something new every day and often it turns out that what we learned the day before was incorrect. It’s easy to get caught up in the moment and take – what we presume to be facts – at face value, even though it might be nothing more than hot air.

The spring rally in stocks has awakened a spring-like feeling of euphoria not seen for over a year. Obama’s budget chief thinks that the economy has almost bottomed out; Goldman Sachs, JP Morgan, and Morgan Stanley have applied to repay bailout funds; the Wall Street Journal reports that stocks rise as recovery hope builds; and Warren Buffett doubles down on derivatives while betting on America.

The meaning of news - in a bull market

Most investors tend to follow the allure of good news, trusting that positive reports will result in higher prices, while only a few bother to second-guess the prevailing atmosphere. It’s important to note that news reports need to be interpreted in context with the market’s overriding trends.

During an extended bull market, good news often results in higher prices. We experienced this first hand in the late 90s, and once again from 2002 to 2007. Back then, good news did result in higher prices. Subsequently, news reports became even more upbeat which drove prices even higher. Expectations were thus justified by the very action that sent prices up.

The meaning of news - in a bear market

Once a bull market reverses, it takes a while for bad news to catch up with lower prices. Up until last October, investors in large were still positive on the market. Why? Denial was the overriding factor. A 20+ year booming economy has conditioned us to believe that prices will go up indefinitely and pullbacks are the best buying opportunities.

Even Warren Buffett stepped into the trap and “bought America” in October 2008. On December 16th, Morningstar reported that the Dow is selling at a 30% discount, while TheStreet.com pronounced the stock sale of century. Despite the alleged discount stocks were selling for, the S&P 500 (NYSEArca: IVV) went on to lose about 30%.

A bear market tends to bottom, at least temporarily, when the media portrays a doomsday-like atmosphere. Do you remember the avalanche of bad news hitting the wires about two months ago? Incidentally, that’s when the market bottomed. On March 9th, the day the market bottomed, the Wall Street Journal featured the following article: “Dow 5,000? There’s a case for it.”

Once again, the good news is now lagging behind rising prices. Eventually it will catch up, if it hasn’t already. Towards the top of a bear market counter move, the amount of positive news culminates in a composite feeling of optimism. Just like a wave reaches the highest point just before it breaks, investor sentiment reaches a crescendo just before the market tops.

The ETF Profit Strategy Newsletter referred to this phenomenon on December 15th, 2008. When it pointed out the following: “Optimistic sentiment, which should be more visible above Dow 9,000, will give way to further declines. These should draw the indexes to new lows (in February the new lows were identified to be below Dow 6,700).” The Dow hovered above 9,000 from January 2nd to the 6th, and dropped to 6,440 within three months.

The recommended ETFs, such as the UltraShort Financial ProShares (NYSEArca: SKF), UltraShort Real Estate ProShares (NYSEArca: SRS), and UltraShort QQQ ProShares (NYSEArca: QID) gained between 50% - 150%.

A 30% rally in the S&P 500 (NYSEArca: SPY) has been enough to convert the doomsday atmosphere present at the March lows into a warm, fuzzy anticipation for more gains to come. Bank stress tests’ results, perceived to be positive, and other factors have lifted financial ETFs such as the Financial Select Sector SPDRs (NYSEArca: XLF), Vanguard Financial ETF (NYSEArca: VFH), and iShares DJ Financial Sector ETF (NYSEArca: IYF) to new highs.

Is this rally about to end

The market has different options to release optimistic or pessimistic sentiment, and/or overbought or oversold condition. The sideways trading seen in April was enough to digest the March bounce. Once the optimistic and overbought condition was relieved, the Dow Jones (NYSEArca: DIA) went on to rally another 700 points.

Today we are at a similar juncture, pent-up optimism will have to be relieved somehow. This might happen in the form of sideways trading or a pullback. Generally speaking, the more extreme the sentiment the bigger the correction.

Have sentiment and overbought readings reached levels indicative of a major bear market top? Not yet. This rally does not yet seem to be over. Aside from the sentiment readings, a two month rally compared to an 18 month meltdown would seem disproportionate. The coming back-and- forth wiggle action should eventually give birth to higher recovery highs.

A choice to make

Investors may consider themselves to be caught between a rock and a hard place. Should you believe reports of a financial recovery, or should you turn to reliable long-term indicators.

Based on the following reports, you may feel tempted to own or buy more stocks: Corporate bonds have rallied sending their yields lower; treasury yields have rallied sending their prices higher; the gap between AAA government bonds and corporate bonds is narrowing, suggesting the financial system is stabilizing.

Below are ETFs tracking the bond market: Long-term Treasuries: iShares Barclays 20+ Year Treasury Bond (NYSEArca: TLT). Short-term Treasuries: iShares Barclays Short Treasuries (NYSEArca: SHV). Corporate Bonds: iShares iBoxx $ Investment Grade Bond (NYSEArca: LQD).

More positive news: The University of Michigan consumer confidence index has risen suggesting a revival in consumer spending. Orders for nondefense capital goods have come off their lows suggesting that businesses are becoming expansion-minded again.

Should you place your confidence in any of the above present day snapshots, or should you trust in long-term indicators with a track record of correctly sniffing out major market bottoms?

There is nothing wrong with looking at the above reports and statistics to pinpoint where we are TODAY. Using today’s numbers though, to manufacture future projections, is like predicting who will win the Super Bowl before the season has even started. Projections are simply the best estimate that can be given at the current point in time. As such, projections are subject to change.

Wall Street analysts have “perfected” this concept, continually chasing the trend. Last month for example, at least one Wall Street analyst finally downgraded Citibank (NYSE: C). Citi has rallied 30% since.

Even though P/E ratios and dividend yields are discussed on a daily basis, Wall Street has overlooked their “crystal ball-like” properties. Some digging in the history books reveals that the stock market does not bottom unless P/E ratios and dividend yields clock in at certain levels. Just as the Super Bowl celebrations don’t start until the game is over, the stock market doesn’t take off for good until those levels are reached.

The Dow Jones measured in the only true currency – gold – provides another sneak-peak into the future. In 1999, one share of the Dow was worth over 40 ounces of gold (NYSEArca: GLD). Since then the gold Dow has fallen faster and harder than the dollar Dow, thus mapping out the Dow’s future.

The March and May issue of the ETF Profit Strategy Newsletter contain a detailed analysis of the above mentioned indicators, along with target levels for the ultimate bottom and a true-indicator inspired chart of the Dow's future performance. Finally, news that can be relied upon!