Both the Wall Street Journal and Investor's Business Daily reported this week that with about 60% of the companies having reported so far, fourth-quarter earnings of S&P 500 companies are down about 20%. Both papers were quick to say that the short-fall was due primarily to the huge losses reported by banks and brokers. Excluding financials, Q4 earnings were up about 11%. So, IBD headlines, Q4 earnings "weren't too bad."

It's this kind of thinking that has gotten investor's into trouble in the past. One simply cannot exclude the fate of financials. They are the main reason the economy and stock market are in trouble. Ironically, neither paper touched upon the true implications of the earnings short-fall.

The "Truth Chart," first presented in my essay of March 21, 2003, shows that Bear Market Scenarios exist whenever S&P 500 earnings are decreasing. I have written about the significance of the S&P 500 earnings trend many times over the past five years. See, for example, my essay of October 13, 2006, in which I labeled the S&P 500 earnings trend indicator "The Bull/Bear Market Indicator." On January 12, 2007, I said that I didn't expect this indicator to go below 1.00 soon. But that was more than a year ago.

We watch the S&P 500 earnings trend very carefully and report on it every week in the Investment Climate section of these Views. Last week the trend indicator showed a reading of 1.02, which meant S&P 500 earnings were still rising, but barely. This week, the trend indicator is at 1.00. It will probably drop below 1.00 next week. When it does happen, we will begin characterizing the Investment Climate in terms of Bear Market Scenarios.

So what does this mean? It means that we have to accept the "New Reality," which I wrote about on January 18, 2008. It means that we have to recognize that the Pros have gone from buying the dips to selling the rallies. It means that we'll be dusting off more of our old shorting strategies and making more money from shorting stocks. It means we'll go back to creating "Bear Market Beater" strategies. It means waiting longer between sustainable rallies. Yes, there will be rallies and we'll be ready for them. In the meantime we need be patient and invest according to the Rules Of The Bear.

GRAVITY.
Gravity used to be one of our best performing strategies during the 2000-2002 bear market. Mr. Gordon White brings it back to life in this week's "Strategy of the Week." Visit the VectorVest University to see how it's done.