Dr. Ben Bernanke, Head of the Fed, left the target interest rate for Fed Funds unchanged at 2.00% last Wednesday. Is that good or bad? Oil futures shot above $142 per barrel yesterday. Is that good or bad? Japan's inflation hit a ten-year high in May. Is that good or bad?

These and a myriad of other things happen every day and stock investors have to decide whether each item is good or bad. News which is deemed to be "good," causes them to buy stocks and drive prices higher. Investors sell their stocks, causing prices to fall, when news items are deemed to be "bad." So what are they thinking? What causes them to decide whether something is good or bad?

In the VectorVest System, we believe that stock value goes up when earnings go up and inflation and interest rates go down. So the key to deciding whether anything is good or bad is what it does to earnings, inflation and interest rates. Rising earnings cause stock value to go up, so that's good. Rising interest and inflation rates cause stock value to go down so that's bad. OK, so now that we know how to decide whether something is good or bad, how do we keep track of all this stuff?

It's impossible to examine each and every item separately, let alone decide whether it is good or bad. In fact, we can't even identify the thousands of things that affect stock prices each day. So we don't even try. But we can gather, track and analyze the cumulative effects of these events in the form of earnings, inflation and interest rates. This information then allows us to assess whether the sum total of all things that are happening are good or bad for stock prices as shown in the VectorVest Investment Climate Report.

This report tracks two measures of inflation, three measures of interest rates, one measure of earnings, two measures of stock price performance and one measure of investment advisors sentiment. The Name, Current Level and Trend of each Indicator is updated and reported each week. The Trend for each indicator is given on a scale of 0.00 to 2.00. Trends above 1.00 are good and those below 1.00 are, of course, bad. Currently, only one of the nine indicators is above 1.00. So that's bad and is reflected in the Composite of Investment Climate Indicators which is at a level of 0.87.

So was Dr. Bernanke's decision to hold the Fed Funds rate at 2.00% a good one? Maybe yes and maybe no. A low interest rate is good for stock value, so that's good, but it also cheapens the U.S. dollar which encourages inflation and that's bad. So we will have to see how Dr. Bernanke's decision plays out. My bet is that he has breathed new life into the Inflation Dragon and that's not good. In any event, the answer will be revealed by The Investment Climate.

P.S. Next week I'll write about how we use the Investment Climate Report to define the Truth Chart and identify Bull and Bear markets. We saw this Bear market coming many, many months ago and told you when it arrived. We will also let you know when the next Bull market is back in town.