Stock prices opened higher today on hopes that Germany and France will fashion a comprehensive rescue package to deal with Europe's crippling debt crisis and solid corporate reports from several blue chip companies also contributed to Wall Street's bullish mood. Does this clear the way for a year-end rally?

Maybe yes and maybe no, solid corporate earnings reports are based on facts and rising earnings lead to higher stock prices. There's no doubt about that. But the Sarkozy, Merkel saga is based upon speculation and nobody knows what they are going to do. Indeed, their negotiations have been a source of uncertainty and the primary cause of extreme volatility in stock prices over the past several months. Time after time, hopes of a solution have been raised only to be crushed shortly thereafter.

Hopefully this little game will end soon. European leaders are scheduled to have a summit meeting on Sunday and another meeting no later than Wednesday. The good news is that they seem to have agreed on what they must do, i.e., save the European Union. Now they must agree on how to do it. This is the hard part, but they must get it done. We need to get back to investing on fundamentals and away from Headline Hysteria.

According to Hirsch's Stock Market Almanac, September is the worst performing month of the year and October, with its violent crashes, is reputed to be the cruelest month. October has a split personality and is also called a "Bear Killer" because it has turned the tide in 11-post WWII bear markets.

With a 8.18% drop in the Price of the VectorVest Composite, September certainly lived up to its reputation. Who will control October, Dr. Jekyll or Mr. Hyde?

Mr. Hyde appeared on the first trading day of October with a nasty $0.76 per share drop in the Price of the VVC and a 258.08 point drop in the Mighty Dow. He showed up again the next morning with a lower open and took the Price of the VVC to a 13-month low of $23.14 per share. Subsequently stock prices recovered from the day's low and a transformation began to occur. Late in the day Dr. Jekyll took full charge of the situation with a blistering $0.51 rally. Dr. Jekyll gave us two more beautiful up days before reverting to Mr. Hyde for the weekend of October 7th.

Dr. Jekyll has been in full charge this week except for a weak day yesterday. It's an awesome task, but can he hang on long enough to make this October another "Bear Killer" month? (The Price of the VVC fell 21.40% from May 2, 2011 to October 3, 2011.) Can he lead the charge to a rousing year-end rally?

Our data says he can. He did it from a $15.60 low on 10/09/98, an $18.67 low on 10/18/99, and a $13.21 low on 10/09/02, I'm betting he'll do it again. Who do you think will be the victor, Dr. Jekyll or Mr. Hyde?

P.S. Although we hit a homerun with the Directional Movement Indicators, DMI, last week, it's important to recognize that our standard Market Timing Indicators were key to making our buy decision on October 5th. The DMI is a wonderful tool for verifying follow-through when you want to place a trade, but it's vulnerable to whipsaws. Watch tonight's "Strategy of the Week" presentation to see what I mean.

I'm at the MoneyShow in Toronto, Canada and yesterday was a big day for VectorVest. We released VectorVest 7 Canada and I had the pleasure of visiting with many of our Canadian friends and subscribers. I also had the opportunity to speak at the opening ceremonies of the Show and I found the presentations of the speakers to be very interesting.

The first speaker was Mr. Derek Burleton, VP and Deputy Chief Economist for TD Waterhouse. He spoke about the current "Economic and Financial Outlook." He opened his remarks by saying that in 2009 he predicted the bull market would last four years and the current soft patch has not deterred him from that view. He explained that stock values are extremely low when compared to long-term interest rates and, therefore, stock prices are most likely to go up over the coming year.

To make his assessment, Mr. Burleton compared the Earnings Yield, EY, of stocks to the Interest Yield, IY, of bonds in much the same way we do. My essay, "Giving Birth to Bargains," (August 19, 2011), explains this analytical technique in detail. In summary, Mr. Burleton's outlook was bullish.

Mr. Jim Jubak, Senior Markets Editor for MoneyShow.com, gave a presentation entitled, "2013-The Year when the Bills Come Due from Beijing to Washington to Frankfurt." He presented a lucid summary of the monetary problems facing the major nations around the world and said not to worry...the financial world will not come to an end in 2011 or 2012. The world's politicians have succeeded in "kicking the can" all the way to 2013. That's when the consequences will hit the fan. Hmm, I can hardly wait.

The final speaker was Mr. Dennis Gartman, Editor and Publisher of the Gartman Letter. His presentation was called, "Food, Fuel, and the Fed: Investing in a Post QE-2 World." Mr. Gartman was both entertaining and informative. His opening comment was that he is a trader, not a traitor, although earning a living by the latter occupation may be easier. He also said that using food for fuel was the most idiotic thing he's ever heard of.

Corn and wheat feed the world and demand will continue to grow. The improved use of fertilizers and genetic seeds will allow the production of corn and wheat to rise to meet the increased demand. The long-term problem, however, will arise in shipping these foods from Australia, Canada and the U.S. to the emerging markets. So keep your eye on the dry-bulk shippers, but don't buy these stocks while they're still going down in price.

Fuel means oil and gas. Mr. Gartman doesn't think Libya, which produces desirable light, sweet crude oil, will return to full capacity for at least two years. So oil prices will stay high. On the other hand, he expects natural gas prices to stay low because of excessive production. (Other newsletter writers are predicting natural gas prices will rise because it will increasingly replace coal to produce electricity.) Mr. Gartman and many others agree, however, that natural gas prices will go up when we begin to export liquid natural gas from U.S. terminals. For more information on this subject, find Cheniere Energy Inc.,(LNG), and click on News.

Mr. Gartman believes the Fed is turning the job of pumping up the economy over to the administration where it belongs. Interest rates will stay low, but there will not be a QE-3, 4 and so on. Finally, he said the U.S. dollar has bottomed-out and will get stronger. He's buying dollars, a nice finish to A Bird's-Eye View of the Future.

Investors are taking money out of stocks at the fastest pace since the Lehman Brothers bankruptcy in September 2008 and they're buying bonds at high prices. This is what investors do when they are fearful.

I have discussed this phenomenon many times in my presentations on "Stock Valuation and Stock Market Cycles," and "How to Master the Market." Investors always strive to put their money where they think it will pay the highest rate of return. They believe that collecting a small but certain Interest Yield, IY, is a better bet than owning stocks with a high but risky Earnings Yield, EY.

Ideally, EY tends to equal IY, but the ratio of EY to IY goes above and below 1.00, depending upon investors' emotions. When investors get greedy, like they did in the late 1990's, they buy stocks at high prices, and EY, defined as 100/(EPS/Price), goes down, often falling to less than IY. When they become fearful, as they are now, they sell stocks at low prices and EY goes well above IY. I explained this in my essay of September 24, 2004 and called the ratio of EY/IY "The Fear Factor."

Exactly six years later, on September 24, 2010, I wrote an essay called, "Stock Valuation," and introduced the concept of Yield Premium, YP. Mathematically, YP = EY - IY. YP is actually a measure of how much investors are willing to pay for stocks in relation to bonds. Investors want more value at lower prices when they are fearful. Therefore, stock value decreases and YP increases as investors become more fearful of stock ownership.

For example, on 09/24/04 the VectorVest Industrial Average, VVIA, was 45.3% above the DJIA, the EY of the S&P 500 was 6.84% and IY of long-term AAA bonds was 5.45%. Therefore, YP = 6.84 - 5.45 = 1.39%. Currently, the VVIA is 11.6% above the DJIA, and YP = 8.03 - 3.36 = 4.67%. As you can see, the ratio of Value to Price decreased as YP increased. Why does this happen?

When investors become fearful of stocks, they really are saying that stocks are worth less. So they sell their stocks, causing prices to fall. But stocks aren't worth less unless EPS has gone down or inflation and interest rates have gone up. Actually, they are worth more because EY goes up when price goes down. Fear and YP are often the culprits which push value and prices down. Remember what Mr. Warren Buffett said, "Be fearful when others are greedy. Be greedy when others are fearful." So be not afraid. Be patient, the market is Giving Birth to Bargains.


PANNING FOR GOLD STOCKS.
You won't believe it, but some weird contra ETF called Factor Shares 2X: Gold Bull/S&P500Bear, FSG, has been going ballistic and is now the number two stock highest ranked by VST. That's crazy man, but the whole gold thing seems crazy to me. I confess, however, I own GLD, RGLD, AUY, NAK and NG. GLD and RGLD have been good, steady performers, but the other guys leave something to be desired. As a matter of fact, the Gold Bugs Index, HUI, which we use in our Midas Touch presentations and the Mining(Gold\Silver) Industry Group really haven't been so hot at all. So what gives with gold stocks?

Mr. Jerry D'Ambrosio, VectorVest Consultant and Instructor, knows what gives, and he will explain the whole thing. Not only that but he will dazzle you with a gold stock strategy that will leave you breathless. So visit the VectorVest University to see how Jerry goes "Panning for Gold Stocks."