Spurred on by a 14,000 drop in new claims for Unemployment benefits, June's 7.2% increase in same-store Retail Sales and a bullish ADP report of 157,000 employees to business payrolls, the Price of the VectorVest Composite broke through strong resistance of $29.54 per share yesterday and closed substantially higher at $29.75. The summer rally was on a roll...until this morning that is.

Investors were stunned today by the Labor Department's 8:30 AM report that only 18,000 new jobs were added to Nonfarm Payrolls in June when 80,000 to 125,000 had been expected. Moreover, the figures for April and May were revised downward, 232,000 to 217,000 and 54,000 to 15,000 respectively, and the unemployment rate increased from 9.1% to 9.2%. Stock futures plunged from gains to losses and the market opened sharply lower. So where do we go from here?

First, let's assess the damage. The Price of the VVC gapped down $0.10 at the open, bounced back a bit; then fell to a low of $29.39 per share, down $0.36 at 11:15 AM. At 12:03 PM it stood at $29.47, a drop of 0.94% from the prior close. The Buy to Sell Ratio, BSR, plunged from 1.24 to 0.92 at the open, fell to a low point of 0.85 and recovered back to 0.92 by noon. I could also see that the percentage of advancing stocks was rising slowly from its low point. So signs of stabilization, if not recovery, were evident.

The best tool I have found for studying intraday market dynamics is the VectorVest RealTime Derby. I use it to compare the percentage of winning Bullish and Bearish searches from the market's Prior Close to the percentage of winning Bullish and Bearish searches from the Market Open. Early in the day, I could see that the percentage of winning Bullish searches from the Prior Close was far less than the percentage of winning Bearish searches. This is exactly what one would expect on a down open.

I saw the opposite result from the Market Open, i.e., the percentage of winning Bullish searches exceeded the percentage of Bearish searches. This told me that bargain hunters were busily buying stocks that had gone down in price. Given this information, I concluded that there was no need to panic. Bargain hunters were doing their thing and a panic day of selling wasn't in the cards.

OK, so we may have dodged a bullet today, but what about tomorrow, the next day and the day after that? Is the rally over?

It's too early to tell. As I've said before, the geopolitical and economic news hasn't been good. Investors got ginned-up over Greece and a lot of other stuff over the last few weeks, but that doesn't look so good in light of today's jobs report. But two important factors are still favoring this market: low interest rates and rising earnings. With the CPI clocking an increase of 3.6% year-over-year, I can't say that inflation is low anymore. I can't say stocks are cheap anymore either. But I can say earnings are still rising and second quarter reports are expected to be great.

Will this be enough to keep the rally going? I think so, but we'll just have to see if good earnings can overcome today's damage or will today's poor jobs report be A Game Changer.

EARLY BREAKOUT LEADERS.
Are you having trouble finding the best Strategy to use when it's time to buy stocks? Last year, April 23, 2010 to be exact, we illustrated a "Strategy of the Week" presentation, called "The Carolina Cocktail," that solves that problem. Now Mr. Gavin Pedrotty, Instructor and Product Support Representative, has developed a new recipe that is easier to mix and tastes just as great. So join Gavin at the VectorVest University to see this week's delicious SOTW presentation, "Early Breakout Leaders."

In an interview this morning with Mr. Art Cashin, Director of Floor Operations for UBS Financial Services, Mr. Joe Kernen, co-anchor of CNBC's "Squawk Box" morning show, asked, "How can the market keep going up higher with all this stuff happening?" Well, that's a great question, so I listened to Mr. Cashin's answer very carefully.

Mr. Cashin, who had just rattled off a string of problems answered, "Well, you certainly don't want a community of over optimists around you, but if you break the market down in three seconds. If you look at the economy, you would have been skeptical about it for months now. If you looked at geopolitics, you would have been very skeptical about it. But if you look at earnings themselves, the earnings have held up very, very well and if we come into the next earnings season, people are going to be looking to see how the profit margins hold up. That's going to be critical."

By golly, Mr. Cashin got it exactly right. Regardless of what else happens, investors will buy stock stocks as long as corporate earnings continue to go up. How do I know that? I read it in my book, "Stocks, Strategies & Common Sense." In Chapter 4, I said that three powerful forces, earnings, inflation and interest rates, convey the effects of all that happens, and ultimately determine the fate of the market.

History has shown that stock prices go up when earnings go up, and prices go down when inflation and interest rates go up. But these forces are independent and they don't necessarily go up or down together. So how can we know what to expect the market to do when these forces go in different directions?

First of all, we track earnings, inflation and interest rates very carefully, week-by-week, in the Investment Climate section of these Views. Then we consult the Truth Chart, which was first presented in my essay of March 21, 2003. The Investment Climate data tells us whether each factor is going up or down, and the Truth Chart tells us what we can expect the market to do.

For example, the situation shown in today's Investment Climate report shows that earnings and inflation are rising, but interest rates are falling. The Truth Chart classifies this combination of factors as a Case 1, Bull Market Scenario. It's a Case 1 scenario because the combination of rising inflation and falling interest rates is one that would normally occur at the end of a Bear market or beginning of a Bull market when the Fed wants to stimulate the economy and doesn't care about rising inflation. And it's a Bull Market scenario because earnings are rising.

Ironically, the Fed is still trying to pump up the economy after more than two years since the market bottomed. I don't know how long the Fed will continue inflating the economy, but Helicopter Ben's actions of zero percent interest rates and Quantitative Easing are causing concern in many quarters. Some people believe that the inflation genie is already out of the bottle. Others feel that the dollar is doomed and long-term bond prices will crash. Others wonder where we're headed in the Middle East and the list of concerns goes on and on.

All I know is that Mr. Kernen would not have needed to ask Mr. Cashin why stock prices keep going up in troubled times if he had known the Investment Climate is in a Case 1, Bull Market Scenario.

EASY RIDER MOVES AHEAD.
A feature of the "Easy Rider" technique is that it can hold long and short positions at the same time. So we thought it would be a good test to see how well it performed through the recent downturn. You'll never guess what happened, so visit the VectorVest University and see how Mr. Glenn Tompkins survives a market downturn as the "Easy Rider Moves Ahead."

Every serious investor should know that high inflation and interest rates are the mortal enemies of a strong economy, and a strong economy with rising corporate earnings is the mother's milk of higher stock prices.

Ironically, Helicopter Ben is trying to stimulate the U.S. economy, boost stock prices, raise inflation rates and lower long-term interest rates in one fell swoop with his QE2 (Quantitative Easing 2) plan of buying U.S. government securities. This plan sounds OK except it will cheapen the U.S. dollar and the idea of raising inflation rates doesn't sit well with me. It is fraught with danger. Putting the genie back into the bottle once you have let him out is very hard to do. With the CPI registering a 1.5% year-over-year gain, high inflation is not yet a problem here in America, but it's a different story in many other parts of the world.

Soaring inflation rates, particularly food price increases, have become a serious problem in Indonesia, India, Brazil, China and other emerging markets. These countries have taken steps, such as raising interest rates, increasing reserve requirements in banks and controlling the flow of "hot money" into their country, to bring inflation back under control. It's too soon to tell whether these actions will curb inflation, but they have caused stock prices to fall.

Some observers blame Helicopter Ben for exporting inflation with his cheap money policies, but he has denied the allegation. There is no denying, however, that stock prices and long-term interest rates have gone up since he announced his QE2 intentions late last August. Of course, we love the higher stock prices achieved since then, but we can't ignore the higher inflation and interest rates we have now. Some Fed Governors are calling for an end to the QE2 plan, but Helicopter Ben is determined to continue on with it, in spite of The Gathering Storm.

P.S. You may track the weekly progress of "The Gathering Storm" of rising inflation and interest rates by referring to the Investment Climate Section shown below and/or viewing the Market Climate Graph.

RISING ETFs.
Nobody categorizes, analyzes, sorts and ranks ETFs like VectorVest, and nobody can present them like Product Consultant, Ms. Nidhee Bhatt. If you like ETFs, you will love to visit the VectorVest University to see Ms. Bhatt do her thing in this week's "Strategy of the Week" presentation: "Rising ETFs."

According to Hirsch's Stock Trader's Almanac, "Santa Claus tends to come to Wall Street nearly every year, bringing a short, sweet, respectable rally within the last five days of the year and the first two in January." On average this rally has been good for a 1.6% gain in the S&P 500 since 1969. If one occurs in the current period, the Bull market is likely to continue next year. Should a loss occur during this period, a Bear market is likely to occur.

Since today is the fifth trading day before the end of the year, we don't know yet if the Santa Claus rally will materialize this year, but it sure looks like it will. So let's ask Santa to put some great stocks into our Christmas stockings.

Given that the U.S. dollar is virtually certain to continue going down in value, inflationary forces are gaining strength. Helicopter Ben says he's 100% certain inflation will not get out of control, but the bond traders and commodity markets don't believe him. So prices of bonds and commodities are going up. Higher bond prices are not good for stocks, but higher commodity prices drive the prices of related stocks through the roof.

So let's start off by asking for some gold and silver stocks. I like GLD, GDX, ABX and GG for gold and SLV, AGQ and SLW for silver. And we must get some copper, coal and other mining stocks too. I love SCCO, FCX, TCK, WLT, and BTU.

Let's not forget the oil industry either. A guy on CNBC this morning said that oil will be over $100 a barrel by Memorial Day. I don't think it's going to take that long. Dr. Ray Irani, who runs Occidental Petroleum is an old friend of mine. He's done a marvelous job over the last 25 years, so I own a good chunk of OXY and would happily take more. I also like TGA and BP on the rebound. It's gotten a lot harder to find and develop huge oil fields so the specialty oil drillers and service companies are going to be in great demand. Think RIG, SDRL, NOV and FTI.

Of course there are many other stocks that I would like to find in my Christmas stocking, but we can't forget about Brazil, China and India. Santa, all you have to do to find good stocks in these countries is open the Special WatchList folder and pick the top stocks in the Brazil, Ka-Ching China and Indian WatchLists. As far as the developing countries go, simply access the ETFs (Foreign\Country) Industry Group and select the top stocks ranked by RT.

Wow, even though it seems like I've asked for a lot, Santa, you have to remember that VectorVest covers over 18,500 stocks in seven databases, so I haven't even scratched the surface. When you get all through with your deliveries tomorrow night, Santa, come back to my place. I'd like to share a great bottle of scotch with you that you gave to me last year as one of my Stocking Stuffers.

THE FORREST GUMP STRATEGY.
VectorVest is an extremely powerful stock analysis system, but it's not hard to use. In fact we continue to implement new ideas to make it easier for you to find winners. For example, we began to review the Winners of the VectorVest RealTime Derby to all subscribers in the Daily Color Guard Report so that everyone would be aware of the hottest Strategies. Then, on October 9, 2009, we presented a "Strategy of the Week" called "Winning With Weekly Winners," which was based upon using the Derby Winners.

On September 14, 2009, we began to publish the best performing Strategies each day in the Color Guard which appears on the Home Page. This meant that you had to go no further than the Home Page to see which Strategies were working the best. On several occasions, we used this information in SOTW presentations to illustrate how it could be used to make money. Now we have developed a method of using the Derby Winners that is so easy even Forrest Gump could do it. So join Mr. Glenn Tompkins, one of our best instructors, at the VectorVest University to see this week's super "Strategy of the Week" presentation, "The Forrest Gump Strategy."