A sure sign that a trend has exhausted itself is when news tabloids start printing stories about economic depression and forecasting stock market crashes.

I can vividly recall some of the U.S. supermarket tabloids that were forecasting a second Great Depression in the wake of the 1998 stock market debacle. The '98 sell-off, which was catalyzed by the Asian currency crisis and the LTCM meltdown, saw the S&P decline some 20% from July-October of '98. About the time that bearish tabloid stories hit the news stands, the stock market had bottomed and was on its way to new highs while the super-charged U.S. economy regained its strength and was running on all cylinders.

Later on there was the 2000-2002 bear market and recession. I still have in my possession a copy of the August 20, 2002 edition of the supermarket tabloid known as the Weekly World News. The front page headline reads, "How You Can Survive! NEW GREAT DEPRESSION: Why you should spend all your money BEFORE banks collapse!" The front cover depicts a man dressed in a business suit holding a cardboard sign which reads, "Will work for $100,000 (scratch), $50,000 (scratch), $20,000 (scratch) a year. Make me an offer!"

Later in the same issue of this tabloid there was an article entitled, "America Becomes a Poor Third World Nation!" The article predicted a "Second Great Depression" and made the following predictions:

• The repossession of cars and pickups nationwide would render the automobile obsolete. The bicycle will take its place as the primary means of transportation for most citizens.
• Offices and factories will be left empty as business go bankrupt.
• High fashion will be a thing of the past. Instead, most women will own a maximum of three dresses held together by frequent patching.
• Prostitution will skyrocket. Women as young as 16 and as old as 60 will be forced to sell their bodies to survive.
• A bankrupt Treasury will be unable to fund Social Security and Medicare.

Granted, this is typical supermarket tabloid fare, which is to say it's prone to comical levels of exaggeration for the purpose of selling papers and to entertain readers. Most tabloid articles are written tongue-in-cheek, yet the contrarian significance is still there when the exaggerated bearish predictions show up on the front covers. The reason I even bother to reprint these 6-year-old tabloid predictions is that while the tabloids may write these stories half-jokingly, many supposedly astute stock market analysts are now making practically the same predictions in all seriousness! (Perhaps they should be writing instead for the Weekly World News.)

What's interesting to note is that this particular tabloid story appeared about a month after the S&P 500 index made its primary bear market low in the summer of 1998. Six weeks after the tabloid appeared, the S&P made its secondary low (a double bottom) and a few months after that it was off to the races!

Here we are more than two months after the stock market panic of early 2008, which was catalyzed by the subprime crisis. Lo and behold, the tabloid indicator has come to the rescue yet again! A British tabloid known as The Independent published an article on April 1 entitled "USA 2008: The Great Depression." The same day the article hit the news wires, the Dow Jones Industrial Average was up nearly 400 points for its eighth biggest point gain ever.

Ya' gotta' love those tabloids! I believe it was super trader Vic Sperandeo who made it a point to read no periodicals except the National Enquirer tabloid. I think he was definitely on to something there.

The article begins, "We knew things were bad on Wall Street, but on Main Street it may be worse. Startling official statistics show that as a new economic recession stalks the United States, a record number of Americans will shortly be depending on food stamps just to feed themselves and their families.

"Dismal projections by the Congressional Budget Office in Washington suggest that in the fiscal year starting in October, 28 million people in the US will be using government food stamps to buy essential groceries, the highest level since the food assistance programme was introduced in the 1960s."

The story continues, "Emblematic of the downturn until now has been the parades of houses seized in foreclosure all across the country, and myriad families separated from their homes. But now the crisis is starting to hit the country in its gut. Getting food on the table is a challenge many Americans are finding harder to meet...."

The article goes on to paint a bleak picture for America's economic and financial outlook. The headline alone is all we need to see, from a contrarian standpoint, to let us know that the extremely pessimistic investor psychology has done its work of divorcing all hope from the public and the mainstream press. Whenever this happens the market has hit bottom and has fully discounted all the bad news by the time the tabloids latch on to it. That's why the tabloid indicator works better than perhaps any other form of news media -- tabloids are always the last ones to recognize a trend...and the trend is always exhausted by the time the tabloids recognize it.

Tabloids aren't the only place where extreme contrarian sentiment can be seen in action. There's an old Wall Street bromide that says whenever cartoonists start homing in on a trend, the trend has reached the point of maximum recognition and is therefore vulnerable to reversing.

Indeed, virtually everyone is thinking the market is on the verge of another meltdown and the economy is headed into a major recession or depression. This sentiment is being expressed throughout any number of mediums, including investor sentiment polls, news headlines and even editorial cartoons. The example shown below is a cartoon frame from the latest issue of Rolling Stone magazine.

Everyone smells a tough recession and bear market ahead, yet the smart money crowd is placing its bets on a reversal of fortunes for the stock market. OEX put/call and open interest ratios are bullish for the first time in over a year as the smart money prepares for what it sees as a positive market environment in the foreseeable future. And as we looked at in the previous report, money supply and the bond yield curve indicates economic improvement is on the way.

On the very day the Independent tabloid article appeared calling for a "Great Depression" in the U.S., the Dow was up nearly 400 points with NYSE trading volume 10:1 in favor of upside volume. There have already been three greater than 9:1 upside volume days in just the last three weeks alone. This is known as a "Volume Blast-Off" signal and it typically carries bullish implications for the stock market.

Once again, the depression mongers in our midst are guilty of peddling their version of a supermarket tabloid scenario. Much like the front cover tabloid scare stories of 1998 and 2002, the 2008 version will be no different. The fear mongers will be forced to beat a hasty retreat as their dire predictions of depression and a major stock market meltdown fail to materialize.

As the interim bottoming process continues, the market's undeniable message is that better days are ahead and with it will come an end to the endless stream of bad news and a better economic and financial market outlook. Are you prepared to take advantage of it?