The Reuter's headline shouted, "Stocks jump as data eases inflation worry." Indeed, Wall Street's spin on May's CPI report triggered a typical Pavlovian response this morning as investors bought all kinds of stocks.

Totally ignoring the news that the Consumer Price Index, CPI, rose in May at the fastest rate in six months, 0.6%, investors chose to react to the performance of the core CPI, which rose at a moderate pace, 0.2%. This increase was "right in line with expectations and should relieve worries that the big increases in food and energy could be breaking through to more widespread inflation."

This generally accepted, but fallacious, view is important to investors because a moderate core rate of inflation, which excludes the costs of food and energy, will allow the Fed to maintain low interest rates and supposedly hasten the return of solid economic growth. A strong economy will, of course, lead to higher corporate earnings which, in turn, will support higher stock prices. So buy now and cross your fingers.

Let's see how this works: On January 22nd, Dr. Bernanke, Chairman of the Federal Reserve Board, lowered the Federal Funds target rate a humongous 75 basis points. In typical fashion, stock prices soared on the belief that this move would stimulate the economy. I tracked the evolution of this rally by using Industry Viewer and Quick Test. Upon opening Industry Viewer that night, I saw that the interest sensitive Groups, i.e., Retail, Building, Financial, REIT, etc., had gone up the most. This was a classic, text book response to a cut in interest rates.

On the evening of the second day of the rally, January 23rd, I was stunned to see that Transportation(Truck) had the highest RT rating. Yes, I had seen where one of the large investment banks had recommended trucking stocks that day, and the Group went up 7.81%? On that same day the Price of the Building(Residentl\Comml) Industry Group rose 10.96%. The economy was still sinking and the credit crunch was worsening, but people were buying trucking stocks and homebuilders. I couldn't believe it.

Nevertheless, I continued to track the Industry Groups daily for RT Ranking and the %PRCs. This process gives me more of a feel for what's going on inside the market than anything I can think of. Curiously, Chemical(Fertilizers) popped 8.54% on 01/24/08 and Energy(Coal) led the pack on 01/25/08 with a gain of 5.78%. Transportation(Truck) was ranked number one by RT on Friday 01/25/08. Go figure.

In addition to working with the Industry Group screen, I like to track the progress of all the groups with Quick Test. On January 24th, two days into the rally from the 01/22/08 low, the Building(Residentl\Comml) Group was still the biggest Price percentage gainer with a total gain of 12.73%. Chemical(Fertilizers) was in fourth place with 8.22%. Transportation(Truck) was in 26th place with a gain of 5.84%.

Lo and behold, on 01/28/08, Energy(Coal) showed up in first place with a total Price increase of 16.31%. Building(Residentl\Comml) was in second place with a 14.81% gain and Chemical(Fertilizers) was gaining ground at 13.60%.

The Building(Residentl\Comml) rally peaked on February 1st, only eight days from the bottom. But it had an incredible gain of 26.68% by that time. Imagine an industry in total distress going up 26.68% in eight days. The annualized rate of return was 973.76%. But it was a suckers rally. There was no reason other than sheer speculation for those stocks to rise. The industry was in deep trouble and it was going to be years before it was well again. As of yesterday, the Building(Residentl\Comml) Group is down 0.55% from its 01/22/08 close.

The Transportation(Truck) Group was up 12.92% as of yesterday and I can't imagine why. Take a look at a 1-Year graph of this Industry Group. Show EPS in the bottom portion of the graph. With forecasted earnings nose diving, why would you want to buy any trucking stocks?

Just for the fun of it, look at the 1-Year Industry graph of the Chemical (Fertilizers) Group. Show EPS in the bottom portion of the graph. Note that EPS is up 100% over the last 12 months and is still rising. This group is up in Price by 40.54% since 01/22/08. Now look at a graph of the Energy(Coal) group. The EPS is up only 40.1% in the last 12 months, but EPS is now climbing at an amazing clip. This group is up 87.88% in Price since the 01/22/08 close.

So, here we have four Industry Groups. The two worst performers from 01/22/08 to current broke out of the gate the fastest. The best two performers showed their stuff a few days later, but they didn't crash and burn. They just kept moving higher. Why?

The answer lies in the direction of EPS. If EPS is rising as it was with the best performers, Price will rise. If it's going down as it was with the laggards, Price will fall. Speculators often push stock prices higher on phony numbers as they did today. But these phony rallies don't last long. It takes good, solid earnings growth to push prices higher and higher over the long-term. If prices rise without earnings growth, you're looking at a Suckers Rally.