This year the mainstream press, government officials and even the Fed have gone out of their way to bring us a scary dose of Halloween well ahead of the traditional Oct. 31.

Where to begin is hard to decide but there is certainly no dearth of examples of the super-concentrated scare tactics that have been employed to frighten the public out of its collective wits. The most prominent example of this has been the nearly ceaseless talk of the housing slowdown and how this will supposedly ruin the U.S. homeowner/consumer and eventually lead to a major economic recession. Headlines underscoring this persistent propaganda are too numerous to mention, as you can easily see this for yourself by merely picking up today's newspaper.

Then there is the growing talk of an economic recession followed by a bear market in the U.S. stock market, culminating with a global economic recession. Even the International Monetary Fund (IMF) has recently gotten on board the bearish bandwagon by releasing a report warning that the risk of a global financial crash is increasing.

One of the most simplified statements designed to give the retail investor an early scare ahead of Halloween is this headline from the Financial Times of Sept. 27: "Bear market has begun." It doesn't get more direct than that!

But the granddaddy of the major news wire stories by far was the MSN news headline of Oct. 5: "Is a Global Crash Coming? (Report warnings world's economy is at risk)." Now anyone who has ever worked for or studied the media knows that stories that evoke negative emotions such as fear, anger or outrage are the ones that sell the most to the public. While it may be tempting to dismiss such alarmist news articles as typical media sensationalism the stories that attempt to forecast financial conditions for the general public have an uncanny tendency to be inaccurate. This is especially true whenever a "crash" or financial crisis prediction shows up in the headlines.

Scrolling on down the page of this latest fear-mongering headline from MSN and we see another list of recent news headlines related to the economy and financial markets: "The economy's next time down has begun," "No shortage of bubbles and troubles," "The financial trap facing the U.S., China." To top it all of there was a rather prominent picture of a growling grizzly bear to accompany this list of articles. Folks, it doesn't get anymore blatant that this! Whenever you start seeing pictures of bears in the financial press it is time to buy stocks with both hands.

There is, of course, a method to the media's madness in starting rumors of financial crises and economic recessions. After all, most if not all major media outlets are owned by the same consortium of multinational corporations with holdings by large banking concerns. As far as the major headlines go, the press is the mouthpiece of these entities and will print only what they are told to print. And the only reason for leading the public along the gloom and doom path is to set up a bull market.

Here's how the game is played:

1. The bearish headlines scare the public into either selling stocks or at least staying on the sidelines until they are led to re-enter the market by the media once again. The purpose of this is to allow the insiders to wrap up their accumulation campaign which has technically been underway way since 2004, particularly in the NASDAQ arena.



2. Once the campaign is complete and the next major bull market gets going the public will gradually be lured back into the market with a spate of bullish stories by the very same press that warned them to stay away from the market a few months earlier.



3. Closer to the top, the press will pull out all the stops in an unmitigated attempt at sucking everyone into the bullish camp just as stock prices reach their peaks. By this time those same insiders who bought when the public was too afraid to buy have unloaded their holdings just in time for the peak The public is left holding the bag.



4. After the peak and during the early stages of the decline that follows, the public is told by the press not to worry ­ it's only a normal correction within a larger bull market. But within a few months it becomes apparent to all but the most naive that a bear market is underway, and with no hope of recovering their initial investments, the public starts selling heavily. This eventually gives way to the final wave of liquidation and the insiders start buying once again at bargain prices.



5. After the bottom is in the media begin another "sky-is-falling" campaign (long after the sky has already fallen, of course) to keep the public from getting any bright ideas about buying stocks on the cheap. This is a game reserved strictly for the insiders.

This is what we saw in 1998-1999 as you could go an entire month without seeing a single negative headline in the major metropolitan newspapers. Every day it was more of the same: "Stocks are going higher; The economy has never been better; It's a 'new paradigm' for the global economy!" In total contrast to the climate of eight years ago, we're seeing much the opposite: "Global economic crisis on the horizon; Major crash is coming; The sky is falling!" Even the weather has been used this year to browbeat the public into staying bearish and fearful and to keep them from participating in the undervalued U.S. stock market. See the editorial cartoon below.

Contrary to what the media would have us believe, October is usually one of the best times of the year to buy undervalued tech stocks ­ something the insiders have been doing in droves. As pointed out by Stock Trader's Almanac (STA), October is a good time to buy depressed high-tech stocks. This is particularly true of semiconductor stocks, as an STA study found that buying the semis in October resulted in an average gain of 29.3% from October-April. As we've been talking about in recent reports I strongly believe the semiconductors will be among the sector out-performers in coming months and I recommend following the Amex Semiconductor Index (SIS) as a proxy for this sector.

One measure of how the media's relentless "the sky-is falling" campaign has paid off is seen in the ratio of calls-to-puts released by the International Securities Exchange. The ISEE Sentiment Index shown below measures the percentage of bearish bets versus bullish bets on the stock market and this has been an historically reliable measure, from a contrarian standpoint, of how the public feels about the market's outlook. It usually pays to "fade" the ISEE Sentiment Index. As you can see in this chart courtesy of HaysAdvisory.com, there has been an extraordinary level of put buying by the public this year ­ the most in over two years ­ and this bodes extremely well for the intermediate-term stock market outlook.

What we are witnessing is the "last hurrah" of the bears. The bears are being set up for a slaughter and woe betide those investors who are caught massively short when the bull market really starts running along with the tech sector. The bearish stories that are so prevalent today will be unheard of by this time next year. Quite the opposite, the financial press will positively glow with reports of how rosy the economy is and how well the stock market has done in 2007. When that happens it will time to once again embrace a skeptical posture and look the other direction. But for now, it's quite comfy being bullish when the press is so bearish!

October 7, 2006

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