Buried in the bowels of VectorVest Views is an extremely important, but mostly ignored, section called "The Investment Climate." The purpose of this section is to ascertain whether key economic factors are favorable or unfavorable for stock prices.

Since it is my belief that stock prices go up when inflation and interest rates go down and corporate earnings go up, we track and report two measures of inflation, three measures of interest rates and one measure of earnings. In addition, we track two independent measures of market direction and one measure of investment advisors' sentiment. Each of these data items are analyzed in terms of level and trend. All of the trend indicators are shown on a scale of 0.00 to 2.00, with values above 1.00 being favorable.

The big news last week was that the trend indicator for S&P 500 earnings rose to 1.01, meaning that S&P 500 earnings are in an uptrend. This analysis was called into question this week by a number of subscribers who observed that forecasted earnings, EPS, of the S&P 500, as shown on a summary graph of the S&P 500 WatchList, have been going lower since January 5, 2010. While this observation is true, it does not amount to a trend analysis for several reasons. First of all, we use smoothed data as shown by a 50-day moving average of EPS. Secondly, we analyze the entire one year data set, not just the last few weeks. Thirdly, we base our conclusion of trend on what our trend indicator tells us.

This information is shown graphically on our Market Climate Graph. The upper portion of the graph shows the weekly EPS as reflected by the 50-day MA and the lower portion shows the value of the Trend Indicator for each corresponding week. Note that the Trend Indicator fell below 1.00 on February 15, 2008. You may say that was way too late, the Bear market was called in my essay of November 2, 2007. Maybe so, but the EPS Trend Indicator allowed us to see the Bear market coming well before it happened, and I wrote about it many times.

Now the EPS Trend Indicator is above 1.00 and it says that better days are ahead for stock prices. The question is, "Will it continue to rise and stay above 1.00?" The current drawdown of S&P 500 forecasted earnings is not a good sign, but I do see that the rate of decent is lessening. I'm hopeful, if not confident, that S&P 500 EPS will begin rising again soon. This is vitally important, because it will ultimately determine the direction of stock prices.

Attendees, here at the Orlando World MoneyShow, are very concerned about the economy and I have received many questions about inflation and interest rates. They are shocked when I tell them that the Inflation Genie is out of the bottle and interest rates are rising even though Fed Chairman, Ben Bernanke, has not yet raised interest rates. With earnings, inflation and interest rates rising, we are now in a Case 4, Bull Market Scenario, climbing the classic "Wall of Worry." While you won't see it on CNBC, you can read all about it in The Investment Climate Report.

P.S. For more information on Stock Market Scenarios, read my essay of March 28, 2003.

BUYING NON-LEVERAGED CONTRA ETFS.
After a big down day like yesterday, you may want to play the market to the downside, but you may not want to increase the volatility of your portfolio un-necessarily. See how you can have your cake and eat it too by joining Ms. Angel Clark, Research Strategist, at the VectorVest University to see this week's very timely presentation: "Buying Non-Leveraged Contra ETFs."