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."

Thirty months ago Dr. Ben Bernanke, Chairman of the Federal Reserve Board, a.k.a. Helicopter Ben, climbed into the cockpit of his trusty flying machine and launched QE1, a process called quantitative easing. In this process, the U.S. Treasury issues bonds and the Federal Reserve prints money to buy the bonds. Its purposes were: (1) to lower short and long-term interest rates, (2) to flood the world with money to create liquidity and stimulate the economy and (3) to help the Treasury sell its bonds at high prices so that it could pay Uncle Sam's bills. Of course, all of these objectives are noble, but the whole thing smells a little fishy.

Nevertheless, Dr. Ben brought short-term interest rates down to "zero percent" and bought $1.75 trillion worth of Treasury issues from March 2009 to March 2010. Indeed, he flooded the country with money like he once said he would. Interest rates remained low, the Treasury got the money it needed, but the economy remained stubbornly sluggish. Banks were now flush with cash, but they weren't lending it out to small businesses and unemployment stayed unacceptably high.

Undaunted, he launched QE2 in September 2010. This $600 billion program is due to end this coming June 30th and the world is quaking in its boots. The stock market, which has been inflated by cheap money, has been going down for several weeks and the bond market, which also has been riding high, could get badly hurt, sending interest rates sharply higher when the Fed's money is no longer there to gin it up. Some analysts are saying it isn't feasible to end QE2 without causing great harm. Others are saying that if he stops QE2; then starts QE3, the value of the dollar will shrivel. So what should he do?

I don't know much about macroeconomics, but I do know something about system dynamics, I think it's insane to shock the economic system by just pulling the plug on QE2. Instead, I believe Dr. Ben should exit QE2 gradually, over a period of time. Helicopter Ben wouldn't just turn off the engine when he wanted to land. He'd bring the ship down and land it in a controlled, thoughtful way. He should do the same with QE2. He needs to conduct A Soft Landing.

P.S. For related reading see my essays of 10/15/10, 11/19/10 and 02/11/11.

P.P.S. Investors holding shares such as AGNC, HTS and NLY which depend upon low interest rates should consider selling them.

HIGH PERFORMANCE TRIATHLON SHORTS.
Just as we expected, there are many great performers among the Strategies submitted for the Triathlon Competition. The best Derby performer since June 1, 2011 is T-13-LP-S. To learn about the unique features and excellent performance of this "Strategy" as well as other top performers, join Mr. Dan Misch, Manager of Retirement Services, at the VectorVest University to see this week's "Strategy of the Week" presentation, "High Performance Triathlon Shorts."

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."