Are you an investor or do you simply invest? People that invest, tend to be reactive to the market’s movements, whereas, real investors are pro-active.

Those that invest, tend to react long after a trend is well established and shortly before it’s about to change.  Real investors listen to the market’s warning signs and take pro-active and preventative measures.

V – L – U – W Recovery

For nearly a year, Wall Street has been discussing the form and shape of the recovery.  Regardless of the recovery shape currently being favored, most are taking credit for discussing something they never saw coming.

In March 2009, when the stock market (NYSEArca: VTI) turned a corner, no one believed in a V-shaped recovery. In late 2009 and early 2010, the V-shaped recovery was a foregone conclusion. Today, the double-dip, or W-shaped recovery is gaining a bit more popularity.

Proponents of a V-shaped recovery (and most other scenarios) behave like fair-weather friends.  They follow the trend and have no issue abandoning the theory that seems least likely at the moment.

As discussed above, those are the traits of people who invest (or tell others how to invest). Real investors gather the facts and form an opinion that’s strong enough to withstand Wall Streets daily fluctuations. Would you listen to someone who’s recommendations change like a flag in the wind?

The ETF Profit Strategy Newsletter’s outlook remained bearish despite rising prices and optimism earlier this year. On March 2, 2009, the Newsletter predicted the onset of the biggest rally since the 2007 highs with a target of up to Dow (NYSEArca: DIA) 10,000.

The rally started just a few days later and carried farther than expected. The Dow Jones (DJI: ^DJI), S&P 500 (SNP: ^GSPC) and Nasdaq (Nasdaq: ^IXIC) rallied 75% bottom to top. In early May, eight out of ten advisors tracked by Investors Intelligence were short and/or long-term bullish. However, fundamentally, nothing had changed. The Newsletter maintained that this was a bear market rally.

There’s No Future in Backward Looking Analysis

Market forecasting is a tricky profession. Often, the market provides mixed signals; therefore, it is paramount to look at more than just one set of indicators or economic gauges.

Analysts, which seem to only look at a trend, were swayed to believe that rising stock prices, along with other lagging indicators, point towards an economic recovery. It was, however, the same trend-following approach that led them to believe that the U.S. would fall into another Great Depression early in 2009.

Connecting three rising dots, drawing a line and assuming that the forth dot is even higher, has little to do with forward-looking analysis. It’s more like driving a car by looking in the rear-view mirror.

To assume that the recession has ended simply because lagging gauges like consumer confidence, manufacturing activity, consumer spending, and earnings have recorded upticks is only a half-hearted and hap hazard attempt to predict the future.

Could it be that lagging indicators are improving because stock prices have rallied? Is it possible that consumer confidence has risen because stocks have rallied? Doesn’t a rising tide lift all boats? What if the stock market is the rising tide?

If that’s the case, one needs to discern why the stock market has rallied and whether such a rally is sustainable.

To spin this thought further, if the March 2009 – April 2010 rally is a bear market rally – which despite its intensity failed to revive the economy – the outlook is very bleak. The chances are high that a negative feedback loop between stocks and the economy will result in a worse than double dip scenario.

Aside from the fundamental flaws we’ve discussed here regularly – unemployment, artificially inflated earnings, valuations, extreme sentiment, etc. – there are other, lesser known facts that serve as a millstone around the economy’s neck.

Worse Than Double Dip

The Washington Post reported that President Obama is pleading for a $50 billion emergency aid package for state and local governments.  The package is needed to avert the layoffs of as many as 300,000 teachers, police officers and firefighters.

As Majority Leader Steny H. Hoyer (D-Md.) puts it, “there is spending fatigue. It’s tough in both houses to get votes.” States and local governments have run or are running out of money and the federal government has reached a point where it might not be able to help.

Imagine those 300,000 workers hitting the unemployment numbers along with the 100,000+ temporary census workers and all the industries affected by the BP oil spill. One June 4, unemployment data didn’t quite live up to expectations and the S&P (NYSEArca: SPY) lost over 4%, in one day.

The Associated Press reported that “Homebuilders (NYSEArca: XHB) are feeling less confident in the recovery now that government incentives for buyers have expired. Their pessimism could drag on the economy.”

ZipRealty.com quantifies the problem of the ending home buyer credit: The number of homes that closed in May is down more than 5% compared to April. Newly signed contracts in May dropped more than 10%. Internet searches on real estate sites are down 20% compared to this time in 2009.

There’s No Inflating Your Way Out of This Problem

Many still believe that the government can print its way out of the economic hole it dug by leaving too much money in the system.

Despite the government’s trillion dollar stimuli, the money supply, measured by M2 has dropped year-over-year for the first time in 15 years. The reconstituted M3 is down for the first time in 50 years.

The meaning of this is visible for anyone willing to look. Everything is getting cheaper. Flat screen TV’s, PlayStations, cell phones, cars, dining out; you name it. This is deflationary.

Once entrenched, deflation is a nasty cycle of falling demand, falling prices, rising unemployment and plummeting stock prices.

During the last quarter, the FDIC’s “Problem List” increased from 702 to 775 banks (NYSEArca: KBE). Total assets of banks (NYSEArca: IAT) teetering on default rose from $403 billion to $431 billion.

The list of problems goes on, but its core is this simple fact: The problems are always worse than initially estimated. Wall Street tends to sugar coat issues, after all Wall Street is in the business of selling stocks. Would you expect an unbiased opinion from a sales person?

In times like these, it takes an out-of-the-box analysis to stay ahead of the unfolding crisis. The ETF Profit Strategy Newsletter provides an unbiased analysis of the economy and U.S. stock market from various angles to discern its short, mid and long-term forecasts.