Nothing, absolutely nothing, attracts more attention at this MoneyShow Conference in Washington DC than when we begin talking about Timing the Market. One look at our Market Timing Graph, which shows the incredible October drop in the Price of the VectorVest Composite and our market calls and the audience becomes spellbound.

It's easy to understand why this is happening. Most of the attendees here have been told by Wall Street Wizards that you can't time the market, so hang in there and buy, buy, buy while your profits wither away. Now, wiser but poorer, they see the light and more than one person has approached me and said, "I attended your presentations last year and I wish I had listened to what you said."

Yes, we were here in Washington last September and while I had turned somewhat bearish on the market, I tried not to make any predictions. I simply advised my listeners to follow our Market Timing Indicators and they would be all right. Many of them did follow our guidance and they are doing just fine. But they now want to know when this bear market will end. I can't give them an exact date, but I can say it will not be soon. How do I know?

Please refer to the Climate Section of these Views. Each week it reports on the Bullish/Bearish status of the market as defined by the Truth Chart. This week it is reporting that the market is in a Case 7, Bear Market Scenario with inflation, interest rates and earnings falling. We will remain in a Bear Market Scenario as long as forecasted earnings are falling. You may get a visual of these data by clicking on Graphs on the Main Menu Bar, selecting Market Climate Graphs, a Period of 5-Years, and both S&P Earnings fields. Then click on Get Graph.

This graph shows how dramatically S&P 500 forecasted earnings rose from 2003, leveled off and peaked on January 4, 2008. Its trend indicator turned lower even as earnings continued to rise because the momentum of the earnings gains lessened. Then the trend indicator fell below 1.00 to 0.99 on February 15, 2008. This is when the bear market began.

The bear market will prevail until the S&P 500 earnings trend indicator goes back above 1.00. I expect to see several months go by before this happens. Not only does the S&P 500 trend indicator move quite slowly, but analysts are cutting earnings forecasts and companies are reporting lower earnings. Taken together, these factors suggest that it will be at least six months before we see the birth of a new bull market. Of course, this does not preclude the occurrence of powerful Bear Market Rallies.

Last week I said that "The key to deciding whether anything is good or bad for stock prices 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." So, rising earnings is good and rising inflation and interest rates are bad. What is the net effect of these conflicting forces?

The answer is given by The Truth Chart. The Truth Chart was introduced to our readers on March 21, 2003. It presents the eight possible combinations of rising or falling earnings, inflation and interest rates that can occur and indicates what effect each combination will have on stock prices. It also arranges the eight possible combinations, i.e., scenarios, in accordance to bull and bear market cycles and identifies where the Investment Climate is within the cycle.

For example, in the March 28, 2003 Climate Section of the Views, I said "With earnings trending downward, inflation trending upward and interest rates trending downward on average, our Truth Chart is telling us that we remain in the Case (8) scenario, looking forward to the end of the Bear market." We remained in this scenario until June 20, 2003 when inflation turned lower; then, on July 3, 2003, exactly five years ago, earnings showed an upward trend, putting the Investment Climate into a Case (2) scenario of rising earnings and falling inflation and interest rates, the classic "Goldi-Locks" scenario in which a Bull market thrives. The Truth Chart told it exactly the way it was. So where are we now?

Unfortunately, our Investment Climate indicators show that earnings are falling currently while inflation and interest rates are rising. This combination reflects a Case (5) scenario in which Bear markets begin. We have been in this scenario since March 28, 2008. Prior to that, the Investment Climate went from a Bull market to a Bear market scenario on February 15, 2008. It was no surprise. We could see this Bear market coming for months ahead of time. How did we do that?

Simply click on Graphs on the Main Tool Bar, select Market Climate Graph and check S&P Earnings and S&P Earnings - VV. Uncheck all other data, set the time Period to 5 Years and click on Get Graph. You could clearly see the path of rising; then falling earnings in the upper portion of the graph, and you could also see the trend indicator go from above 1.00 to below 1.00 on February 15, 2008. What could be clearer than that? You may also wish to read my essay of October 13, 2006, called "The Bull/Bear Market Indicator." OK, so when will this Bear market end?

According to what our Investment Climate indicators and the corresponding Market Climate Graph are showing for S&P 500 earnings, it's going to be many months, perhaps a year or more, before we see a Bull market scenario identified by The Truth Chart.

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.

As I sit here writing this essay, Mr. Mark Haines, Co-Host of CNBC's Squawk on the Street, is disputing the need to "seasonally adjust" economic data. Although he's out-numbered, three to one, he hangs in there and says, "Just give me the number, all I want is the truth."

Lots of luck buddy boy. Mr. Haines is not a flashy, financial kind of guy, often seen on CNBC. He's a lawyer by training and consistently challenges his co-workers and guests on the credibility of what they say and the data they present. When last Wednesday's durable goods data was spun around to make a down report look like it went up, he said he'd like to have an economist keep score for his struggling Mets. Now he's accused of being an old curmudgeon.

Frankly, I feel a lot like Mr. Haines does. I'm tired of being lied to. I'm tired of hearing about durable goods orders, ex-transportation, and CPI inflation data, ex food and energy. I read an article in the Wall Street Journal this morning which explained why the CPI did not fully reflect the runaway housing prices during the bubble and will mask the drop in housing prices in the current market. The CPI does not include housing prices, actually. It uses a measure called "owner's equivalent rent," which is supposed to reflect what homeowners would pay to live in their homes if they were renters. Brilliant!

Regardless of what you hear or read, you've got to understand that a tidal wave of inflation is sweeping around the world and engulfing America. This month's CPI report of 3.9% inflation, year-over-year, is a joke. Everyone knows that the cost of living is going up much faster than that. Yes, I'm talking about the cost of living, not a phony number, conjured up by a slick government economist.

Crude oil prices have skyrocketed and gasoline is up 30% from a year ago. Food prices have soared, thanks in part to the ethanol fiasco, and now, Dow Chemical is raising prices as much as 20% on its products. USA TODAY says it's just the most recent of a flurry of price hikes affecting everything from tissues, to coffee to paint. I can go on and on with stunning examples of price increases on steel, copper, coal and so on, but where can we get the truth on inflation?

Many observers believe the price of gold is the best leading indicator of inflation. I have no reason not to believe them. When I created VectorVest, I used the CPI in my valuation formulas and I still do. But VectorVest also tracks the Commodity Research Bureau Index, which we report in the Investment Climate section of these Views. You may see an 11-year, weekly graph on the CRB Index by clicking on Graphs on the main toolbar, clicking on Market Climate Graph and selecting the CRB Indicators.

Note that the CRB formed a double bottom in 1999 and 2001; then made a long steady climb from 184.49 to a high of 338.64 in May 2006. It fell to a low of 290.62 in January 2007 and embarked upon a parabolic rise to 431.07 since then. That's a 48% increase in 16 months, i.e. an average of 3% a month, not a measly 3.9% per year. Coincidently, the price of gold has gone up an average of about 3% per month since the middle of 2001.

The thing I like about using the price of gold or the CRB Index to track inflation is that their prices are what they are. No B.S. No Lies.

P.S. You may also enjoy reading my essays of 06/08/2007 and 06/15/2007.