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."