Wall Street has a history of bidding up stocks that have no fundamental reason for gaining in share price. Such is the case with newspaper stocks recently.

Shares in big newspaper chain McClatchy (MNI) have moved from a 52-week low of $.35 to $2.54. The improvement in the stock of The New York Times Company (NYT) is not as great, but is still staggering. It has risen from a 52-week low of $3.44 to $8.36. The shares in the largest newspaper company in America, Gannett (GCI), have rebounded from their period low of $1.85 to $9.81.

All of these companies have falling revenue, sharply falling profits (or net losses), and balance sheets with tons of debt. The rally in newspaper stocks is based on the notion that the worst is behind the industry. But the fact is there aren’t many reasons to believe that is true.

The New York Times newspaper recently surveyed several analysts who cover the industry, and most said that advertising revenue still has not found a bottom. Ad sales are the largest component of newspaper revenues, and they are expected to be down 25% in the third quarter. They were down by about the same amount in the third quarter last year, so the total reset from 2007 is close to half.

While the market hopes that newspaper ad revenue will recover as the recession recedes, there are a number of reasons to question that assumption.

The most important slice of the newspaper advertising revenue pie is classified advertising. Some papers have seen a 30% drop in sales for this category. The reason for the drop has been the internet. Operations like Craigslist have stolen revenue. And it is not coming back.

The savior of newspaper advertising sales was supposed to be the revenue that papers would get from their own websites. Publishers have found out that even internet sales gets clobbered during a deep recession, and the plans to have online sales offset print have been blown apart.

The other factor that has undermined advertising is the extent to which large newspapers have cut their circulations to save money. Marginal subscribers who live far from printing presses or those who pay low introductory rates are being jettisoned. That may help circulation profitability, but it cuts the size of the number of copies that an advertiser can buy to show a marketing message.

Newspaper stocks are almost certainly trading too high, and if third quarter numbers are weak, they are ripe for a sell-off.

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