Headline hysteria continued to dictate the day-to-day direction of the market this week and new leaders in Greece and Italy assumed the responsibility of cleaning up the economic crises in their respective countries. Their actions will dictate the performance of stock prices for months to come.

In this respect, Europe and the U.S. are on the same path. Mr. Barack Obama is campaigning actively to be re-elected President of the United States and a cadre of hopefuls are seeking to take his job. Whoever is elected President will face the awesome task of jump-starting a weak economy, reducing sovereign debt and creating new jobs. Difficult as these challenges may be, the power and prestige of the office is so great the candidates will do almost anything to get elected. History shows that the incumbent typically has the upper hand.

Incumbent Presidents usually have the power of the pocket book available to them and they spend tremendous amounts of money in the third year of their term to stimulate the economy and create jobs. Investors like a robust economy with rising corporate earnings and voters like plenty of readily available jobs. Jeffery Hirsch's Stock Trader's Almanac 2011, pg. 130, claims that, "the last two years (pre-election year and election year) of the 44 administrations since 1822 produced a total net market gain of 718.5%, dwarfing the 262.1% gain of the first two years of the administrations."

Mr. Dick A. Stoken stated in his book, "Strategic Investment Timing," that "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." Since the next presidential election will be in 2012, the really juicy part of this election cycle began in October 2010 and will end early in January 2012. Let's see how well it has done so far.

The Price of the VectorVest Composite closed at $25.34 on 10/01/10, and closed yesterday at $26.05. So it has shown a gain of $0.71 per share or 2.8% in the past 13 1/2 months. That's really not very juicy, so what went wrong?

A lot of things went wrong. President Obama spent a lot of money "stimulating the economy" in the first two years of his administration and Ben Bernanke, Head of the Fed pitched in by lowering interest rates and flooding the world with U.S. dollars. The stock market responded with healthy gains in 2009 and 2010, but that hasn't been the case this year. The economy has weakened this year; Dr. Bernanke tightened the spigot on money supply and Europe's debt problems have destroyed investors' confidence in the future. To make matters worse, conservatives won't let President Obama get his hands on enough money to do the things Presidents usually do at this point in time to soup-up the economy. No wonder stock prices have gone down this year.

But that doesn't mean we can't make money going forward. We just have to "Let the trend be our friend." Buy stock on rallies, take profits and/or sell stocks on drawdowns. Fortunately, that's what we do.

To sum it up, this Presidential Cycle has been reversed: monetary stimulus was applied in first two years of President Obama's term and the market performed well. There hasn't been much monetary stimulus so far this year and there probably won't be next year either. So the third and fourth years of this cycle will not be remembered as banner years in the chronicles of Presidential Election Cycles.

Most investors are looking forward to the coming year with great anticipation and there's good reason to. The good news is that corporate profits are still rising and the bull market scenario will continue as long as earnings go higher.

If you're a regular reader of the Investment Climate Section of these Views, you may recall that our Trend Indicator for S&P 500 Earnings crossed from below 1.00 to above 1.00 on January 29, 2010, signaling the onset of a Case 4, Bull market scenario. This scenario is one in which earnings, inflation and interest rates are all rising. It is identified in my essay of 03/21/03 as the scenario when the "Bull Market Ends." The reason why is because rising inflation and interest rates are bad for the economy and, therefore, bad for earnings. It is our belief that Bear market scenarios prevail when earnings are trending downward and Bull markets prevail as long as the S&P 500 Earnings Trend Indicator stays above 1.00. You may see a graph of these data points by accessing the Market Climate Graph and checking the boxes for S&P 500 Earnings and S&P 500 Earnings - VV.

The beauty of this graph is that it allows us to see exactly when Bull and Bear markets begin and end. For example, it shows that S&P 500 Earnings exploded in May 2003 from the 2000-2002 Bear market bottom and peaked on January 4, 2008. The Trend Indicator crossed from below 1.00 to above 1.00 on June 27, 2003, hit a high of 1.19 several times in the August to October 2004 period; then slowly tapered off toward 1.00 while earnings growth dissipated. It finally crossed below 1.00 on February 15, 2008, confirming the onset of the 2008 Bear market. This graph allowed us to foresee that terrible market coming well ahead of time. In my essay of November 2, 2007, I wrote the following message to new subscribers:

"The Confirmed Down signal that we received yesterday could be the entrée to a long Bear market. We aren't there yet because earnings are still rising according to our method of analysis. Yet, we no longer appear to have the support of an accommodative Fed and that can make things very bad for the stock market. So don't be deceived by the endless parade of experts who will appear on TV and other places telling you to buy stocks. This is not the time to buy stocks."

Things are totally different now. We have an extremely accommodative Fed, maybe too accommodative, and our Market Climate Graph shows us that S&P 500 Earnings are rising very nicely. Yes, the Trend Indicator is heading back toward 1.00, but look at where it's at, a lofty level of 1.37. So it has a long way to go before it crosses below 1.00.

Another piece of good news is that we are in the "juicy part" of the "Election Cycle." The theory of the Election Cycle is discussed in Chapter 19 of Stocks, Strategy & Common Sense and says that stock prices go up during the last two years of a President's term in office. The "juicy part" is the fifteen month period beginning in early October, two years before the election, and it lasts until early January of the election year.

This indicator has a very good track record and, remarkably, the market even went up in the troubled period of October 2006 to January 2008. The Price of the VectorVest Composite went from $26.55 per share on October 6, 2006 to $28.43 per share on January 4, 2008.

Finally, the year-end, "Santa Claus" test that I wrote about last week is hanging in there. It's up 0.28% over the last five days, but there's still two days to go into next year before we get the final signal. I'll let you know how this works out next week.

While all of this sounds good, it doesn't guarantee anything. Nevertheless, I'm bullish. I'm looking forward to The Year Ahead.

SPECIAL NOTE:
Knowing when Bull and Bear markets begin and end is not an issue of market timing. The earnings indicator is too slow to be used as a market timing tool. But it is a strategic issue. It defines the way you should manage your portfolio.

In a Bull market you should think about buying stocks and ETFs low and selling high. Be more aggressive in buying stocks and ETFs long and less aggressive on selling them. Buy the dips. Go bottom-fishing, i.e., get in at the first sign of an upturn, sell high, wait for another down turn and do it over again. You may also use wider Stops on your long positions. Avoid selling-short.

Do just the opposite in a Bear market. Think about selling stocks short and buying Contra ETFs at the peaks and buying-to-cover stocks and selling Contra ETFs at bounces from bottoms. Wait for the end of another upturn and do it over again. You may also use tighter Stops to cover your short positions on stocks and close Contra ETFS positions. Avoid buying stocks long to open.

STRATEGY OF THE YEAR.
On September 10, 2010, Mr. James Penna gave an elegant presentation on using the S&P500/RT Strategy to produce a gain of over 95% in 14 months. Then, on October 29, 2010, Mr. David Thornton, used the same Strategy with a more aggressive portfolio management technique to produce a far greater return. Not to be outdone, Mr. Penna returned the following week and gave an marvelous presentation using the same strategy once again.

Folks, the S&P 500/RT Strategy has worked over and over again. It's the perfect example of how to make money in a Bull market. So Mr. James Penna is back again to show us one more time how easy it is to make great profits with the S&P 500/RT Strategy. Please visit the VectorVest University to see this week's great "Strategy of the Week" presentation: "The Strategy of the Year."

It is said that the definition of insanity is doing the same thing over and over again and expecting a different outcome.

It seems to me that our government leaders are doing the same thing to jump start the economy. Take "the deal" between the President and the Republicans in Congress, for example. In this deal, the President basically agreed to a two-year extension of "the Bush tax cuts" in exchange for a 13-month extension of payments to long-term unemployed workers. The deal, which was approved last night by Congress, also included additional funds to stimulate the economy, a 2% cut in Social Security payments and various tax breaks for corporations, investors, heirs and others. So, is the deal going to revive the economy and create jobs?

Well, let's see. The government has already spent hundreds of billions of dollars of stimulus money to no avail. The Bush tax cuts were in effect throughout the crash and unemployment compensation already was extended to 99 weeks. If the economy was growing too slowly when the aforementioned stimuli were supposedly doing their thing, why would an extension of the status quo make it grow faster? It won't.

The fact is that elimination of the Bush tax cuts will torpedo the stock market and stifle what little growth the economy currently has. President Obama knows this and he can't let it happen. To be re-elected, he knows he must get the economy going and the Unemployment Rate down. He's Not Insane.

Stock prices took off with a bang this year with huge gains on the first day of trading followed by five more consecutive up days. Only four times in the last 82 years has the S&P 500 Index started a year with five consecutive up days, let alone six consecutive up days. So there was no telling where the market was heading, but there are ways to get some clues.

According to the 2010 Stock Trader's Almanac's First Five-Day Indicator, the S&P 500 will end the year higher when the S&P 500 goes higher in the first five days of trading. The S&P 500 has gone up 31 times in the last 36 years and the S&P 500 has ended the year higher 86.1% of the time. The average gain for all 36 years is 13.7%. Not bad. So things were looking very good for 2010 after the first full week trading. But the S&P 500 went down on January 12th; then again on January 15th, and, my goodness, three more times on January 20th, 21st and 22nd; then two more times on January 26th and 28th. Now the delicious gain after the first six days is gone and the S&P 500 is even down from its December 31, 2009 close. So what's the market going to do now?

Well, let's see. The Stock Trader's Almanac says the January Five-Day Indicator has a spotty record - almost a contrary indicator in midterm election years. In the last 15 midterm years, only seven entire years followed the direction of the First-Five Days and only one of the last eight, 2006. The full-month January Barometer has a much better midterm record of 66.7% accurate. In other words, 10 of the last 15 midterm election years followed January's direction. Every down January on the S&P 500 since 1950, without exception, preceded a new or extended bear market, a flat market, or a 10% correction.

Wow, this doesn't sound good. What does it mean? First of all, it says that since the S&P 500 went up during the first five days of January, the Indicator (which is pretty unreliable and has acted like a contrary indicator in midterm elections) is pointing to a down year. Since the S&P 500 is down for the full month, there's a 66.7% chance that the S&P 500 will end the year lower than 2009's close of 1115.10. Moreover, the bear market will have been extended, or the market will have been flat or experienced a 10% correction, if the S&P 500 does close the year lower.

OK, so that's what the Stock Trader's Almanac says, but what do I think? Well I'm not quite that gloomy and the main reason is that S&P 500 Earnings have been rising and our trend indicator of S&P 500 Earnings, as shown in the Market Climate Graph, is about to go above 1.00. My belief is that stock prices will rise as long as earnings continue to go higher. Sure, we could have a 10% correction, but rising earnings will trump The January Barometer.

HOW TO TRADE CONTRA ETFS.
The market has been nasty lately, punishing stocks with good earnings as well as bad, so we finally caved in and started buying Contra ETFs. If you are not familiar with these stocks, you must see this week's "Strategy of the Week" video. Please join Mr. Todd Shaffer, Senior Instructor and Product Support Consultant, at the VectorVest University to see this week's very important presentation: "How to Trade Contra ETFs."