47.3% of all statistics are made up … as is the number of allegedly made up statistics.

Even though accurate, statistics can be very treacherous for investors. The deceptive power of statistics does not lie in their accuracy (or lack thereof), it lies in their application.

Most of us, for example, know how to use a compass. The compass, if adjusted right, always points north. What though if someone wasn’t familiar with a compass and interpreted the direction of the needle as the direction you should go, instead of north. In this case, even a properly adjusted compass would be misleading. It may sound like a cliché, but stats and news reports tend to be misapplied to the investor’s detriment.

Investors are bombarded with economic readings and statistics on a daily basis. Those include, but are not limited to; jobless claims, housing price index, new housing starts, consumer prices, consumer sentiment readings, retail sales, volatility index (Chicago Options: ^VIX), spread between Treasuries and bonds, trading volume, breadth and even performance.

Many indicators merely provide a snapshot of the current state of affairs and are thus useless, even deceptive if used as a forecasting tool. Others are contrarian in nature. Unfortunately, most investors are unaware that good readings and news often signals trouble ahead. Unsuspecting investors are, therefore, often lured to get into or out of the market at the worst times.

The tug of war of emotions

The stock market’s performance reflects the constant tug of war between investors’ fear of losing money and the fear of losing out on making money. Those fears are fueled by statistics and news reports and tend to lead to bad buy-and- sell decisions (more about that in a moment).

To illustrate: Previously in 2008, the ETF Profit Strategy Newsletter predicted new lows for the first or second quarter of 2009 and advised investors to sell stocks above Dow 9,000. Why? “Optimistic sentiment, which should be more visible above Dow 9,000, will give way to further declines.”

The increased optimism surrounding  the Dow 9,000 level early in January 2009 provided a false sense of security. Furthermore, it triggered the fear of losing out on future profits. The Dow Jones had rallied from below 7,500 to above 9,000. Most were afraid of losing out on further gains.

As it turned out, there were no further gains. The Dow Jones (NYSEArca: DIA), S&P 500 (NYSEArca: SPY), Nasdaq (Nasdaq: ^IXIC) and most other market indexes shed some 30% over the next 90 days. Extreme optimistic sentiment signaled a large decline ahead.

If you think you are right, do the opposite

Conversely, extreme levels of pessimism can mark a bottom. Concerning a market bottom, the ETF Profit Strategy Newsletter wrote the following on February 13th, 2009: “At this point, the best target for this temporary low is 6,700 for the Dow (DJI: ^DJI) and 700 for the S&P 500 (SNP: ^GSPC)). Extreme pessimistic sentiment may drive the indexes even towards Dow 6,000 and S&P 600. A multi-month rally founded on this low should lift the markets by 30-40%.”

What would drive the indexes towards a major bottom? Extreme pessimistic sentiment. This would also signal a market bottom. On March 2nd, the newsletter sent out a Trend Change Alert with the recommendation to sell short ETFs, such as the UltraShort S&P 500 ProShares (NYSEArca: SDS) and UltraShort Financial ProShares (NYSEArca: SKF), and buy long or leveraged long ETFs such as the Ultra S&P 500 ProShares (NYSEArca: SSO) and Ultra Financial ProShares (NYSEArca: UYG). UYG gained as much as 145% since.

If you mentally turn back time to early March, you will remember the doomsday atmosphere of that period. The news reports and statistics were exclusively bad with no hope on the horizon. On March 9th, the day the Dow Jones bottomed, the Wall Street Journal even ran an article titled “Dow 5,000? There’s a case for it.” Going against the grain, or being a contrarian, had once again paid off.

The March 2nd Trend Change Alert noted the following regarding the length, breadth, and top of the rally: “This counter trend rally will have to be broad and powerful in order to relieve investor's penned up urge to buy. Nevertheless, keep in mind this will be a counter trend rally, the down trend will resume once the rally exhausts itself. This point of exhaustion is likely to happen at a point where optimism takes over and investors think that the Q1 2009 lows are here to stay.”

This counter trend rally certainly has been broad and lifted all major indexes from small cap stocks (NYSEArca: IWM) over mid cap stocks (NYSEArca: MDY) to large cap stocks (NYSEArca: IVV). The financial sector (NYSEArca: XLF) more than doubled on the heels of the recent rally.

News and stats viewed in the right context

Knowing that the current rally is a counter trend rally, puts the recent positive news reports in the proper context and provides valuable guidance about exit points for all sorts of stocks.

New bull markets climb a wall of worry. New bull markets don’t ascend via an escalator of hope. The financial media has been filled with hopeful stories such as: “The worst is over” – “The March lows were a picture perfect market bottom”, or “Now is the time to buy.”

Declining jobless claims, increasing investor confidence, stabilizing retail sales, rising home prices, drop in corporate bond yields, uptick in the Purchasing Managers Index, and all other positive news reports are part of the topping process.

Just as you would expect dark clouds and an ominously quite atmosphere before the storm hits, you can expect a measure of peace and quiet before the next financial storm.

Stuck at crossroads

At this point, the optimism has not quite yet reached levels indicative of a market top. There seems to be more room for this rally to grow.

Nevertheless, this rally is approaching its point of exhaustion. Along with another rise in stock prices, will come a new wave of euphoria. This will mark the quiet before the storm. How will your portfolio fare in a financial storm similar to what we’ve seen in 2008 and early 2009? Smart investors will “storm-proof” their money while there is still time.

The ETF Profit Strategy Newsletter consistently evaluates a composite of statistics, news, indexes, and long, mid-and- short term indicators to ascertain where the market is headed. This approach has proved successful during even the most trying of times. Imagine where your portfolio would be had you adopted this contrarian approach previously at the all-time stock market high in 2007.