Comfort Zone Investing: Real rally or false hopes?

- Earnings improve in the financial sector. That means banks, thrifts, insurance companies report positive profits from earnings, not sales of assets. And their loan loss reserves decrease, not increase. Traditionally, financials have been the industry that leads a new market rally since they're the engines that fuel the economy by lending to other industries. When banks increase earnings at a noticeable rate, then a real rally is possible.

- All earnings improve. Earnings are the fuel that makes the market go higher. When most industries report higher earnings, it means the economy is back on track. In addition, look for analysts to raise estimates for future earnings.

- Foreclosure signs are gone. One of the strongest engines in the economy is housing. When new houses are built, more people are employed, not only to build them but at complementary industries that supply the housing market. Only after most of the foreclosures have been bought can demand for new housing begin. While they are regional in nature, foreclosures affect the psychology of buyers. As long as there are ample properties at low prices, buyers are reluctant to purchase new homes in an area. Once foreclosure signs go away, it signals a number of things: It means buyers are back. It means banks are lending. It means more jobs in the area as homebuilders hire carpenters, plumbers and other sub contractors for new homes to be built.

- Jumbo loans find buyers. Once institutions have filled with Fannie Mae and Freddie Mac qualifying loans, they'll start to loosen their loan sizes to incorporate jumbo loans, the loans that don't qualify for purchase by Fannie or Freddie. Right now, jumbo loans have very few buyers so the high end of the market is suffering. When institutions feel the need to stretch their limits for quality jumbo loans, the top end of the housing market will come to life. People looking to move up can find financing. Home builders can start to cater to that segment of the market. That creates more jobs, more income, more expenditures, more demand for goods and services.

- People can get loans. When you or your neighbors once again find financing for home purchases or home equity loans without having to deposit the amount you want to borrow, it's a sign that the economic stimulus is working. As loans become more available, to qualified borrowers, not to everyone, more cars and houses can be purchased, sending a positive ripple effect through the whole economy.

- Interest rates start rising. Yes, that's right, going up, not down. That means borrowing has picked up to a level where lenders are trying to discourage some borrowers or eliminate some. Since rates are very low currently (the recent Treasury auction for 3 month bills returned zero percent...people just wanted to be sure their money was safe....interest on top of that? no thanks), they will attract borrowers.

Unfortunately at the moment, only very highly qualified borrowers can get money. As the economic stimulus package flows through the banks, more money will be available, and rates will stay low. But at some point, demand will overwhelm supply, and rates will start to rise. That's a great bellwether for a healthy economy. If they keep rising and inflation takes over, that's a bad sign, but we're far from that.

Of course, stocks will have moved up quite a bit before these overt signs are visible. The stock market tends to be ahead of the economy by at least 6 to 9 months. That's why there are so many fits and starts to any rally. One economic indicator will be positive, and the market rallies. The next one is negative, and the market flounders. When the majority of economic news becomes positive, then it takes off. But it will already be well off its lowest levels by then.

If investors wait until they see the writing on the wall, they can still make money. The ones who begin to invest while the writing starts are the ones who make the most. When the writing starts is anybody's guess but once the message is writ, everybody will know. And all the smart money will already have been invested.