January didn't start off very well for the stock market this year. After a blah December, investors began taking profits gained from the Fall rally and were losing confidence in the market's outlook. The Percentage of Bullish Advisors, shown in the Investment Climate section of these Views, had fallen from 59.80 on December 8th to 56.50 on January 5th. It continued to go lower as the month progressed, falling to 52.70 by January 26th. So what was the problem?

Some investors thought fourth quarter earnings reports would not be hot enough to move the market higher. Others felt that inflation was too hot to please the Fed. Still others believed that interest rates were signaling a cooler economy. Nothing seemed to be just right, and worst of all, our Market Timing Indicators were moving lower. The Price of the VectorVest Composite moved 32 cents per share lower in the first three days of trading, sending our Buy/Sell Ratio, BSR, to its lowest level in four months. This indicator, which we call the "Canary," was gasping for air. Then the December economic data began rolling in.

A strong December jobs report and a jump in average hourly earnings provided good news to Main Street, but essentially wiped out any chance that the Fed would lower interest rates soon. Good news for consumers came in the form of falling oil prices and December retail sales were the best in five months. Other signs of an improving economy also began to appear. Fourth quarter earnings reports were pretty much as expected, causing no widespread problems. The PPI and CPI inflation reports were also in line with modest expectations. Finally, fourth quarter GDP came in at a robust 3.5% with no implications of rising inflation. So chances of the Fed raising interest rates at their January 30-31 meeting became virtually nil. The only thing investors had to fear was The Fed itself. What would it do? What would it say?

Nobody was surprised that The Fed held the overnight federal funds rate steady at 5.25%. But they were plenty pleased at what it had to say, i.e., "Indicators have suggested somewhat firmer economic growth. That could boost inflation risks and more rate hikes may be needed." But, they also said inflation is easing and should continue to do so. Stock and bond prices soared. The Fed had literally acknowledged the soft landing.

A growing economy would keep earnings on the rise. Inflation was tame and interest rates weren't rising. Everything now seems just right. At 2.60, the Canary is now singing a happy tune. It was Goldilocks to the Rescue.