VectorVest's 'truth chart' provides an objective way to analyze the macroeconomic state of the market. Basically, the Truth Chart unemotionally answers the question are we in a bear market? Or a bull market?
In bull markets, the majority of stocks rise and investors can hold long-term positions with higher probability of gains. A bear market is just the opposite - owning stocks comes at much higher risk and investors should take defensive actions to protect their portfolio from catastrophic losses like those seen in '08.
To determine the market's state, VectorVest believes the answer lies in tracking the trends of the three forces that hold ultimate influence over the market's price direction - earnings, interest rates and inflation. Based on the favorable or unfavorable condition combination of these indicators the market will be in one of four possible bull or bear market scenarios as shown below (please note, these stages do not need to occur in the market in consecutive order).
Each week, VectorVest shows the current level of the significant market indicators that are used to gauge earnings, interest rates and inflation, as well as whether the trends of those indicators are favorable or unfavorable based on a scale of 0.00 to 2.00. Values above 1.00 are favorable, values below 1.00 are unfavorable. A composite of the trends is calculated and updated each week and a five week history is included for reference (below).
For the week of January 3rd, 2014, our Composite of Investment Climate Indicators rose 0.01 point to a level of 0.91. The major mover last week was the S&P 500 Index, whose indicator fell 0.09 points. Our forecast of S&P 500 Earnings rose $0.01 to $4.39. Its indicator also rose 0.01 point to a level of 1.12. This means we currently have a Case 3, Bull market scenario in which earnings and interest rates are rising, while inflation is falling.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.