President Bush has been in office slightly over six years now and Dr. Ben Bernanke has been Chairman of the Federal Reserve for 14 months. Mr. Bush has been wallowing in historically low approval ratings for many months while Dr. Bernanke has received relatively good marks so far. Currently Mr. Bush is trying to win a war in Iraq and Dr. Bernanke is engaged in steering the economy to a "soft landing" in a "Goldilocks" environment. Victory in Iraq and a "soft landing" are dreams yet to come true, but the "Goldilocks" environment is here, right now. Nothing could be better for stock prices. U.S. stocks are greatly undervalued and their prices should be soaring. Yet, the U.S. stock market has been one of the poorest performers in the world. What is the problem?

Investor fear and uncertainty. Nothing stifles a stock market like fear and uncertainty. I addressed the issue of fear last year in my essay, "A Fear Index," dated March 17, 2006. As noted in that essay, "I believe stocks are so undervalued in this country because investors lack confidence in our leadership. History tells me that (Earnings Yield), EY, goes above (Interest Yield), IY, when things are not going well. So the ratio of earnings yield to interest yield is, in fact, a Fear Index." Indeed, little has improved for Mr. Bush over the past year and EY/IY currently stands at 1.16, which means that investors are still fearful.

Although Dr. Bernanke was welcomed to his job as Head of the Fed and was expected to bring clarity to the Fed's monetary policies, uncertainty has been the name of the game. He got into hot water a year ago when he explained to Ms. Maria Bartiromo that he had not turned dovish on inflation. Again, this week, in Congressional testimony he explained to the Joint Economic Counsel what the most recent FOMC statement was meant to convey. The next day he had to explain to the press what he explained to Congress. But that's only the half of it.

Dr. Bernanke elected to let the data drive his decisions. That's fine, but he's always waiting for more data. His job is to analyze the data he has, decide what he needs to do and communicate his policy to the public. He has to act decisive whether he is or not. Waiting for more data conveys indecision and that begets uncertainty. See my essay of August 11, 2006, "The Last Data Point." I concluded that essay by saying, "uncertainty and a bumpy market will rule the roost as long as we have an indecisive Fed." Did I say bumpy? That's the hallmark of The Bush/Bernanke Market.

VECTORVEST U.K.
I will be leading a VectorVest team at "The London IX Investor 07" show in London, England and we would love to see you there. For more information, simply click on the Event link shown above. The top stocks in our VectorVest U.K. database and the entire English stock market have performed magnificently well since we started coverage on July 3, 2006. For example, the MTI for VectorVest U.K. crossed above 1.00 on July 25th and stayed above 1.50 most of the time, never going lower than 1.15. Making money in that market has been like shooting fish in a barrel. To see what I mean, call 1-888-658-7638 now and ask for a Free Trial to VectorVest U.K.

Investors came out of the gate Monday morning ready to buy stocks. They also bought stocks on Tuesday and they went wild on Wednesday when the Fed announced the results of their Federal Open Market Committee meeting. Much of the buying was predicated on the belief that the Fed would relax its bias from raising interests to fight inflation to lowering interest rates to support the economy and to relieve the sub-prime mortgage problem. Apparently, the Bulls think they got what they wanted. Even though many analysts have disputed the meaning of the Fed's remarks, there's another problem.

The downturn which started from the February 22nd peak is incomplete. While the drawdown on the Price of the VectorVest Composite from the 02/22/07 peak to the 03/05/07 low point was 6.3%, and many market mavens think that was enough, our key market timing indicators suggest it was not. As I said in my essay two weeks ago, I like to see our Market Timing Indicator, MTI, go down to about 0.60 and the Buy/Sell Ratio, BSR, go below 0.20 to signal a solid bottom. This did not happen. The MTI went down to 0.69 and the BSR went to 0.38 on the 03/05/07 low point. So I'm not comfortable with the current rally. Moreover, I have a hard time seeing the market taking off from its current level.

Yes, the Fed said the right things last Wednesday to support a sustainable rally. In fact, it reminded me of 1995 when Dr. Greenspan was engineering the impossible dream, a soft landing. (See my essay of 09/29/06.) But can Dr. Bernanke do it now? Yes, I think he can. The strength of the world economy will keep the U.S. from going into recession. This, of course, would be very good for stock prices and I do expect 2007 to be a good year for the stock market. But I still would like to see a slam, bang, bone-crushing sell-off to provide the bargain prices needed for a long rally. Until the market consolidates and the MTI and BSR hit those trigger points cited above, it still has to complete some Unfinished Business.

THE HOMEBUILDER'S DEMISE.
Here's a blurb from an article written by Mr. Matt Blackman, a Trade System Guru: "With the benefit of hindsight, we know now that the real estate market peaked around mid-summer 2006. But a year earlier in August 2005, the VectorVest homebuilder's index, a basket of 26 homebuilders and suppliers, had already peaked. By the end of 2005, while the majority of investors continued to be bullish on real estate, chart readers and traders had begun to turn bearish. What did they see that the market didn't?"

Mr. Blackman shows the reader what he saw using stunning graphics from VectorVest. To access the article click on http://www.marketwatch.com/news/newsletters/gurus_corner.asp.

I received an email from a subscriber yesterday which raises some very interesting issues. In part, the email says, "You have tremendous discipline and confidence to stick with short sales in the model portfolio; everything you say is right on the money. Had your critics waited a few days they would have changed their tunes.

I noticed that the stock market seems to deflate every few days with the high flying stocks giving back much of their gains. I think this is hedge funds taking profits and maybe manipulating options.

I'm sure there was funny business on February 27. Stop loss orders placed with my broker hurt me a lot. Stocks opened below the stop, my orders executed then the price rose - all in a few minutes. This sell-off did not correspond to options expiration, but I think some hedge funds took advantage of a bad day when stocks were down. Spook the market (drive price down) then buy shares cheap from buyers who panic."

Yes, indeed! Ever since the market flattened-out in December, money has been rotating out of winners and going into laggards. High flyers have been getting pasted, but that's nothing new. Unfortunately, it's a tough market in which to make money if you're a momentum player. Our Model Portfolio went essentially nowhere in the last quarter of last year even though we ended-up with a 60% gain. It was weird.

Even weirder is the choppiness of the market. There once was a time when a down week in the Price of the VectorVest Composite was a noteworthy event. Not anymore. Just look at a four year display of the Market Timing Graph in the weekly mode. The longest string of consecutive up weeks was six, and that happened in 2005. In the 31-week rally from July 21, 2006 to February 23, 2007, there was only one five-week string of higher prices. In the first ten weeks of the rally, there was a string of four consecutive up and down weeks. So what's going on?

First of all, more and more trades are being made with sophisticated computer systems that include technical analysis models or derivations thereof. These systems take profits in short spurts and buy at support levels. I have read that these systems, including program trading, now account for more than 50% of all trading. But you can't blame only the hedge funds for what's going on. The big brokerage firms and investment banks led the way with program trading many years ago and they continue to be the major players in system trading. They make hundreds of millions of dollars a day trading stocks, so they're not going to stop.

As far as placing stops with a broker, I stopped doing that years ago. They only use the information to pick your pocket. Another problem I see is that of big price movements before the market opens. More often than not, the bulk of a day's price change occurs before the open. How can you make money under those conditions? The answer is that we have to do a better job of calling our shots. This means we need to be patient when we need to be and act quickly when we should. Right now, we're waiting for the market to come to us. We're not going to chase it up and down every few days. It's called Survival 101 in A Changing Market.

If I've heard it once, I've heard it a hundred times. "Has the market bottomed?" CNBC commentator, Mr. Mark Haines, believes it bottomed last Monday. His colleague, Mr. Joe Kiernan, isn't so sure. Both of these gentlemen have logged thousands of hours watching the market and listening to stock market experts present their views, and yet they can't agree on whether or not the market has bottomed.

Of course they can't. Neither of them is paid to interpret the market and they don't have the tools to help them do so. To make matters worse, they are required to listen to an endless parade of ill-informed, biased guests who do little more than confuse everyone. So we can't pay much attention to CNBC. We need a fact-based system to analyze the market and one that has been shown to work. Fortunately, we have one.

Last week I said we were going to let this downturn play itself out and watch our Market Timing Indicator, MTI, and Buy/Sell Ratio, BSR, very carefully. Now if one looks at a five-year display of our Market Timing Graph, they could easily see that the MTI goes down to or below 0.60 at the bottom of every major downturn. It hit 0.69 last Monday. That isn't low enough to make me feel comfortable that we have seen the bottom of this downturn. Furthermore, I have stated on a number of occasions that a downturn is essentially completed when the BSR goes below 0.20. It closed at 0.38 last Monday. This, too, is not low enough to say the bottom has been reached.

Ah ha, you say. Everyone has gotten bullish since Monday and stock prices have been moving sharply higher. What do you have to say about that, smart guy? Well, no downturn goes straight down from peak to valley. Just look at last May, for example. The Price of the VectorVest Composite fell sharply for eight of eleven days before rebounding. Then it fell for seven straight days to the low point on June 13th, when the BSR hit 0.10. Similar patterns have been seen in virtually every major downturn in the past. So I'm not going to feel comfortable going long until I see the BSR go below 0.20. It's the key to Calling A Bottom.

P.S. Mr. Gordon White will illustrate how to call a bottom by using the Market Timing Graph in this week's "Strategy of the Week" presentation.