While I am not in the forecasting business, I have faith in the Presidential Cycle and I have gone on record many times, having said so. For example, I cited this phenomenon in my essays of 12/30/05 and 12/29/06 in which I discussed "The Year Ahead" for the stock market.

In my 12/29/06 essay, I elaborated on my comments of 12/30/05 in which I said "the first two years of a President's term usually are not good for stock prices, but the last two years usually are outstanding." This meant that one should have logically expected above average stock market performance in 2007 and 2008, the last two years of President Bush's term in office. In my book, "Stocks, Strategies & Common Sense," I quoted Mr. Richard Stoken who said, "The really juicy part of the election cycle is the fifteen month period beginning in early October, two years before the election, and lasting until early January of the election year." This meant that the "really juicy period" started in October 2006 and would end in January 2008.

So I had no trouble saying that 2007 would end with a rally even though I thought it would have a correction beforehand. Now, here we are in September 2007, the market is in rally mode and we still have four "really juicy" months left to go in the election cycle. Do I still expect prices to rally right into January 2008? Yes, of course I do. That's fine, but what about the weak dollar, the credit crunch, high oil prices, weak home sales, tapped-out consumers, job lay-offs and whatever?

Forget about it. When interest rates go down and earnings go up, stock prices go up. Am I sure about that? Yes, I am, but there are no guarantees. It really doesn't matter, anyway. VectorVest will guide us in the right direction, whatever stock prices do. In any event, it's nice to have a bullish outlook on Where The Market's Heading.

Three weeks ago, I wrote about the Investment Climate and how we track the key factors affecting stock prices. Then I wrote about the Truth Chart and the role that The Fed plays in deciding the fate of the economy and the Investment Climate. Two weeks ago, the Truth Chart said we were in a Case (2) Bull Market Scenario, the most desired Investment Climate. This combination of factors, in which earnings rise while inflation and interest rates fall, is often called the Goldilocks scenario.

Now we need to see whether Dr. Bernanke does, in fact, lower interest rates in time to sustain a Bull Market Scenario or whether he waits too long and allows the economy to go into the tank. I believe he will lower interest rates soon simply because of the Presidential Election Cycle. Nevertheless, what is the factor in the Investment Climate that will signal to us whether Dr. Bernanke has done his job or not?

It's the earnings trend. The Truth Chart shows that earnings must be rising in order to have a Bull Market scenario. In other words, the market will be in a Bull Market scenario as long as the earnings trend indicator is above 1.00 and a Bear Market scenario when it is below 1.00. So does this mean that the earnings trend is the only thing we have to watch?

No, not at all. As noted in my essay of 03/28/03, the only difference between Case (1), Bull Market Begins, and Case (4), Bull Market Ends is that interest rates were falling in Case (1) and rising in Case (4). Currently, the market is in a Case (3) scenario. It attained a Case (2) scenario three weeks ago, after being in a Case (4) scenario for months on end. It is very difficult to avoid a Bear Market scenario after being in Case (4) for a long time. That's why it's important to watch the earnings trend so closely. There are several ways to do this.

The easiest way is to simply go to the Investment Climate section of these Views and read what it says in the row marked S&P Earnings. Another way is to click on Graphs on the Main Tool Bar and Market Climate Graph. Once you have checked S&P Earnings and S&P Earnings-VV, you'll see that while earnings have been rising smartly for over three years, its trend indicator peaked at 1.19 in mid-2004 and has now fallen to where it was three years ago. A third way to see S&P earnings is to click on WatchLists on the Main Tool Bar, click on Stock WatchLists, click on S&P WatchLists, click on S&P 500, click on the data row at the bottom of your screen and click on Graph on the Local Tool Bar. Use the Edit Field List to chart EPS.

The sum of all this is that earnings are still rising, but the rate of increase has been diminishing. Nevertheless, I don't expect to see a Bear Market scenario soon. In any event, we'll let you know when we get a change in The Bull/Bear Market Indicator.

Two weeks ago, January 27, 2006, I wrote about "Two Good Indicators," i.e., the January Barometer and the Presidential Cycle. The former indicator signaled that the stock market would go up in 2006 and the latter suggests that the market will form a bottom in October; then take-off like a bird.

There is a third indicator, the Super Bowl Indicator, which was quite popular several years ago, but has recently lost much of its luster. This indicator says that the stock market will go up when a team from the old National Football League wins the Super Bowl. The Pittsburgh Steelers won last Sunday's Super Bowl, so it says we should expect stock prices to go up this year. Or should we?

Although this indicator had a phenomenal 90% success rate over its first 31 years of existence, it has been wrong more often than not over the last nine years. Even so, some proponents argue that it still has a much better track record than most analysts. Indeed it does. But I wouldn't pay any attention to it because it's totally nonsensical. So why am I writing about it?

Simply because it illustrates a phenomenon we should be aware of, i.e., the correlation of unrelated events. The media likes to publicize these artifacts because they attract attention, but they are less than useless. Unfortunately, it's not always easy to identify a contrived correlation of unrelated events. Take the January Barometer, for example. What does January's performance have to do with the stock market's performance for the whole year? I don't really know, but it could be investor psychology. That's just a guess.

The Presidential Cycle is the indicator I like the most of the three we've discussed here. It is based upon logical cause and effect relationships and has a good track record. In my book, it is by far The Best Indicator.

THE RIMM STRADDLE/STRANGLE SWAP.
Take a look at a 1-Year, Daily graph of Research in Motion, RIMM. Is that ugly, or what? Its price action has been up, down and totally unpredictable. And well it should be.

RIMM has been locked in a legal dispute with an outfit called NTP over patents covering the technology it uses in its popular BlackBerry PDA's. If RIMM loses, it may well be forced to shut down its U.S. wireless e-mail service. This event would probably cause RIMM's stock price to plunge. On the other hand, a victory would probably cause its price to soar. This is a perfect set-up for buying a Long Straddle Option position.

But there's a small problem. The court decision is scheduled to be made on February 24th while the next option expiration date is February 18th. Therefore one is forced to trade the March options to be in the game on February 24th, and this could get expensive. So what to do?

Consider selling the February Straddle and buying a March Strangle. In this fashion, one would receive about $3,550 for selling 10 Feb 70 Call and 10 Feb 70 Put contracts, the Straddle, and pay $2,700 for 10 Mar 75 Call contracts and $3,000 for 10 Mar 65 Put contracts, the Strangle. Their net cost would be $2,150 not counting commissions.

In this fashion, one could make a pot of dough if RIMM explodes upward, above $75/share, or plunges downward, below $65/share. Beautiful. This illustrates The RIMM Straddle/Strangle Swap.

WARNINGS:
(A). PLACE THIS TRADE AS ONE COMBO ORDER.
(B). DON'T MAKE THIS AT ALL UNLESS YOU ARE AN EXPERIENCED OPTION TRADER.

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.