Referring back to my essay of March 6, 2009, "Itching to Rally," it was clear to me that investors wanted to buy stocks very badly. They were discounting all manner of bad news, believing whatever lies were being told and ready to climb the slippery slope of hope. Boy, did they!

The Price of the VectorVest Composite is up 31% from its March 9th close and investors' sentiment has undergone a mighty change. Investors now believe that the bear market is over and stock prices are more likely to go up than down. The only problem is that they are not convinced. Why should they be?

The bear market isn't over and it won't be for a long time to come. The economy is in terrible shape and there's no guarantee it's going to get much better soon. All the talk about the housing market hitting bottom on June 30th, "green shoots," and GDP going up in the fourth quarter is just a lot of hooey. For months, Dr. Ben Bernanke, Head of the Fed, has been saying that the economy will be growing by the end of the year. Yet, the minutes of the Fed's April FOMC meeting, released Wednesday, shows a forecast of a worsening economy in 2009.

Yesterday's news that Standard & Poor's said the U.K. has a 1 in 3 chance of getting its credit rating downgraded from the AAA sent stock prices plunging around the world. It also raised concerns about the U.S.'s AAA credit rating, sending both the U.S. dollar and U.S. government bond prices lower. Government data showing on-going jobless claims at a record high and a Philadelphia Fed survey showing further contraction of manufacturing activity also dampened hopes for an early end to the recession. So what are bullish investors thinking?

They're thinking that bad news offers new opportunities to buy stocks at lower prices. Their strategy has changed from "selling the peaks," when they were bears, to "buying the dips," now that they're bulls. Instead of sliding down the slippery slope of hope, they're Climbing the Wall of Worry.

In writing this essay last year, I pretty well bet the farm that the power of the Presidential Election Cycle would make 2007 a "very good, but not spectacular" year for the stock market. Well, 2007 definitely was not a spectacular year for stock prices and there's some doubt that it was even very good. It wasn't as good as I had hoped for, but it still gave us a lot of opportunities to make good profits and that's what really counts. So what about 2008?

In a nutshell, I don't think 2008 is going to be all that good for stock prices. The market has been acting tired for several months now and the general perception is that the economy and earnings growth are slowing down. Worse yet, the fear of inflation is increasing and investors don't believe that Dr. Bernanke is lowering interest rates fast enough to prevent a recession. Now I know these perceptions may not necessarily be true, but where's the spark going to come from to push stock prices higher?

Even though 2008 is the fourth year of the election cycle and fourth years have been very good years for stock prices, I'm not expecting much for next year. President Bush is a lame duck president and has very little ability to influence much of anything in a positive way. So how bad will the stock market get in 2008?

Well, I don't think it's going to be that bad. For one thing, the economy is still growing, albeit at a slower pace. And earnings are still going higher year-over-year. This is the key. The market is going to remain in a bullish scenario as long as earnings are going up. If stock prices go down while earnings are going up, there will be more bargains to feast upon. These feasts will spark the rallies needed to push the market higher. So I'm not worried if the market's not going to be so hot in 2008. I'm prepared to go bargain hunting in The Year Ahead.

SMOOTH COMFORT.
Stocks with high Comfort Index (CI) ratings have the best looking chart patterns in our database. One wonders how these stocks can just keep going higher and higher. Invariably, they are driven by powerful earnings performance. Mr. John Campbell will show us how to turn this performance into profits in this week's "Strategy of the Week." Visit the VectorVest University to see John's presentation on "Smooth Comfort."

President Bush has been in office slightly over six years now and Dr. Ben Bernanke has been Chairman of the Federal Reserve for 14 months. Mr. Bush has been wallowing in historically low approval ratings for many months while Dr. Bernanke has received relatively good marks so far. Currently Mr. Bush is trying to win a war in Iraq and Dr. Bernanke is engaged in steering the economy to a "soft landing" in a "Goldilocks" environment. Victory in Iraq and a "soft landing" are dreams yet to come true, but the "Goldilocks" environment is here, right now. Nothing could be better for stock prices. U.S. stocks are greatly undervalued and their prices should be soaring. Yet, the U.S. stock market has been one of the poorest performers in the world. What is the problem?

Investor fear and uncertainty. Nothing stifles a stock market like fear and uncertainty. I addressed the issue of fear last year in my essay, "A Fear Index," dated March 17, 2006. As noted in that essay, "I believe stocks are so undervalued in this country because investors lack confidence in our leadership. History tells me that (Earnings Yield), EY, goes above (Interest Yield), IY, when things are not going well. So the ratio of earnings yield to interest yield is, in fact, a Fear Index." Indeed, little has improved for Mr. Bush over the past year and EY/IY currently stands at 1.16, which means that investors are still fearful.

Although Dr. Bernanke was welcomed to his job as Head of the Fed and was expected to bring clarity to the Fed's monetary policies, uncertainty has been the name of the game. He got into hot water a year ago when he explained to Ms. Maria Bartiromo that he had not turned dovish on inflation. Again, this week, in Congressional testimony he explained to the Joint Economic Counsel what the most recent FOMC statement was meant to convey. The next day he had to explain to the press what he explained to Congress. But that's only the half of it.

Dr. Bernanke elected to let the data drive his decisions. That's fine, but he's always waiting for more data. His job is to analyze the data he has, decide what he needs to do and communicate his policy to the public. He has to act decisive whether he is or not. Waiting for more data conveys indecision and that begets uncertainty. See my essay of August 11, 2006, "The Last Data Point." I concluded that essay by saying, "uncertainty and a bumpy market will rule the roost as long as we have an indecisive Fed." Did I say bumpy? That's the hallmark of The Bush/Bernanke Market.

VECTORVEST U.K.
I will be leading a VectorVest team at "The London IX Investor 07" show in London, England and we would love to see you there. For more information, simply click on the Event link shown above. The top stocks in our VectorVest U.K. database and the entire English stock market have performed magnificently well since we started coverage on July 3, 2006. For example, the MTI for VectorVest U.K. crossed above 1.00 on July 25th and stayed above 1.50 most of the time, never going lower than 1.15. Making money in that market has been like shooting fish in a barrel. To see what I mean, call 1-888-658-7638 now and ask for a Free Trial to VectorVest U.K.

You may recall that I wrote about the Presidential Cycle in my essay of 12/30/05. It says, basically, that stock market performance is usually mediocre during the first two years of a President's term, but is quite good in the last two years of the term. We are now in the second year of President Bush's second term. Therefore, this indicator is saying that 2006 is likely to be only a so - so year for the stock market. This indicator was on the mark last year.

I wrote about the so-called "January Barometer" last year in my essay dated 01/21/05. This indicator, created by Mr. Yale Hirsch of Stock Market Almanac fame, says that the market's performance for the year will emulate January's performance. The Price of the VectorVest Composite fell $0.65 a share last January, so the market should have also gone down. The DJIA did, in fact, close down slightly last year, but the S&P 500 and NASDAQ composite were up slightly. The Price of the V V C was up 4.0%. I'd have to say that this indicator was also on the mark last year.

So both the Presidential cycle and the January Barometer worked last year. How are they doing so far this year? As of last night, the Price of the V V C was up 4.7%. Unless the market tanks over the next two days, the January Barometer is signaling an up market for 2006. The Presidential Cycle implies that 2006 won't be so hot, so it's not looking too good right now. But hold on a minute.

If one were to use 1998 and 2002 as examples, they would see that the market started off reasonably well in both of those years, then began to crumble in May and June. In both cases, the market bottomed in October and rallied strongly into the following year. If this market does the same thing, the early months will look pretty good, the summer months will be painful and the latter months will be those of recovery. In the end, the January Barometer will have done its thing early in the year and the Presidential Cycle should rule in the latter months.

If the Presidential Cycle works as it has in the past, the big rally which is expected to start late this year will last clear through January of 2008. So that's the story on Two Good Indicators.

THANK YOU VERY MUCH.
A new man, Dr. Ben Bernanke, will be taking over as Chairman of The Federal Reserve Board next Tuesday, January 31st. Many analysts are concerned about how well Dr. Bernanke will fill the very large shoes of current Chairman, Dr. Alan Greenspan. This was also the case 18 years ago when Dr. Greenspan took over from Mr. Paul Volcker.

The story of this transition was told in an excellent article, "Skepticism Greeted Greenspan, too," in yesterday's edition of USA Today. Mr. Volcker was a giant of a man, both physically and intellectually. He took office in 1979 when inflation was looking to go out of control. To make a long story short, Mr. Volcker took care of that.

What about Dr. Greenspan? How well did he do? There's a crowd in New York that doesn't think he did very well at all and criticize him at every turn. That's easy to do because anyone could allege that things would have gone much better had Dr. Greenspan done this or that. There is no way to know what might have happened had the geniuses had their way, so let's look at some facts:

Yes, there were three recessions and some economic slow-downs during his tenure. There were several financial crises, three bear markets and several market melt-downs, too. But through it all, Dr. Greenspan made the moves to right the problems and this country prevailed and prospered. Gross Domestic Product, for example, grew from $4.8 trillion in 1987 to $12.6 trillion in 2005 for a gain of 163%. Population rose 21.8%, from 243 million to 296 million, over this same period. So per capita spending is now greater than ever before. For investors, the S&P 500 went from 300 in August 1987 to 1,284 today, a gain of 328%. For that, I say nice job Dr. G., and Thank You Very Much.