Watch for the US pre-election rally! (page 1 of 4)

First, there was Elaine Gazarelli telling us that the stock market would go up further based on a strong economy and favorable corporate profits, and that, after a brief correction in the autumn, stocks would rise even further in 2005. Asked which sectors she favored, she replied that high-tech stocks were the most attractive.

Then came a survey of CNBC watchers about which factors were the key drivers for the stock market. Seventy-seven per cent responded that corporate profits were the single most important factor driving stock prices. Feeling enlightened by these deep insights, I then switched back to MTV.

Joe Granville, who became world-famous in the 1970s and whose book New Strategy of Daily Stock Market Timing for Maximum Profit (Prentice Hall, 1976) I highly recommend, had this to say about "news".

'Traders and investors get into more trouble and make more expensive wrong decisions by following news than for any other reason. So heavily influenced by the news, the majority get lost in the maze, unable to see what the smart money is doing.'

News is also important to the smart money because they understand the role news plays in the market game, and they can usually act more effectively under the protective cover of news. They know that the news misleads the opposing game players into selling them when the smart money wishes to buy and into buying their stocks when the smart money decides that the time has arrived for distribution.

As a market aid, news is of little or no value in playing the market game successfully. News is generally for suckers. It misleads more often than it guides.

It creates mistimed fears which provoke selling at the wrong time and raises hopes which encourage the buying of stocks at the wrong time. The reason why news has very little relationship to what the market is going to do is simply because the market is moving on tomorrow's news, and thus the current news is a stale factor to the market.

It is the out-of-step timing between news reporting and market action that enables the market game to be played so successfully by the smart money, preying on the public's over-reliance on current news as a guide to what the market is going to do.

Therefore, if you hear daily on CNBC how strong the economy is and that the economic recovery will after the recent lull continue (even if it were true, which is another matter), it may not necessarily lead to higher stock prices, because stocks already went up over the last 18 months and until just recently on the expectation of the current favorable economic news. Granville devotes a paragraph to corporate earnings, entitled "Earnings - The Big Sucker Play".

According to him, "probably no greater deception faces the average market follower than the general overemphasis on corporate earnings as a reliable guide to where the market price of a stock is headed. Yet 99% of all market followers are grounded in the belief that what a company earns is the very guts of what the stock market is all about. They couldn't be more wrong. When a company reports that it earned $4 a share in a given year, it is incontestable a fact, no argument about that." [As we know, the quality of earnings can vary significantly ed. note.]

That fact, however, may be completely irrelevant to what the price of the stock is now going to do. The reason is simple and yet most people give it very little consideration. The fact that the company earned $4 a share is a statement of knowledge up to that moment.