While the talking heads on CNBC were going ga-ga about the Mighty Dow hitting six-year highs, it's up only 11.4% since we signaled the beginning of the uptrend on October 21, 2005. The iShares MSCI Brazil, (EWZ), soared 44.94%, iShares MSCI Korea, (EWY), rocketed 36.89%, and the iShares S&P Latin Am, (ILF), exploded 36.52% over the same time period. Stock markets around the world have out-performed the U.S. market by a wide margin. So how does one get in on the action? This question is like asking who's buried in Grant's tomb. Use ETFs, of course.

I first wrote about ETFs on September 9, 2000. Back then, we had only 67 ETFs in our database, but they were increasing in popularity. Today we have 228 ETFs in our database and are adding more regularly. We accumulate them in an Industry Group called Market(Baskets). So they are easy to find and use. It is important to know that we do not attempt to assess ETFs for Value or Safety, but we do track their performance with our Relative Timing indicator, RT. We also give Buy, Sell, Hold ratings on each ETF. We demonstrated how one might manage a portfolio of ETFs in last week's "Strategy of the Week," which you may see by visiting the VectorVest University.

ETFs are portfolios or baskets of stocks, having something in common, which are traded just like common stocks on the American and New York stock exchanges. Many of them have options. The theme or common factor identifying an ETF is usually obvious from its name, and range from countries, to businesses, to commodities and to mimicking indexes. They offer the benefits of trading select mutual funds at less cost and more convenience. And they provide investors with an excellent way of diversifying their portfolios, reducing risk and entering hot markets or market sectors that they otherwise would not. I particularly like to invest Around The World With ETFs.

MICROSOFT'S MISERIES.
Bill Gates and his buddies were at the right place at the right time in the 80's and they did the right things. They were fabulously successful. This success allowed them to write the rules and dominate their industry. Like several other great American companies, they were sued by the U.S. government for having monopolistic powers. Although they ultimately settled this and many other lawsuits, they were never the same.

Clearly, Microsoft needs better management. I'm not talking only about their inability to get quality products to market on budget and on schedule, I'm also thinking about their financial management. In 2004, they chose to issue a cash dividend of $3.00 per share. Total cost was about $32,000,000,000. As I predicted, the cash dividend did nothing to raise the price of the stock.

I would have preferred that they spend the money buying back their own stock and institute a regular program of buybacks. Although they have over 10 billion shares outstanding and they say they need to spend more money to fight Google and Yahoo!, they still generate billions of dollars of cash each month. By now, they could have reduced the number of outstanding shares by as much as twenty percent. It seems to me that its stock price would not be languishing at $24 per share had they driven their earnings per share up by an additional 20 percent.

Now they have another $50 to $60 billion in cash. They should use it to drive up the price of their stock. Otherwise, their shareholders will continue to suffer from Microsoft's Miseries.

When I started buying stocks about 45 years ago, I used a very simple approach to managing my portfolio. There were a couple of reasons for this. One reason was I really didn't know anything about managing a stock portfolio, and the second reason was that I didn't have the tools to do anything more than use a transaction log and a profit and loss table. But it really didn't matter. I wasn't buying that many stocks anyway. Brokerage fees were so high that I was very deliberate about what I bought, and then I was literally forced into holding my stocks for the long-term because of the high transaction costs. More often than not, this practice caused me to hang on to losers too long and it cost me money I shouldn't have lost. Then I got into the bad habit of selling my winners to make up for the losers. All in all, it was a mess.

Finally I decided not to let brokerage fees dictate how I managed my portfolio, nor should I allow tax considerations to dominate my decisions. I had to let the stocks tell me what to do. So I began to use a 10% stop-loss price as a signal to sell and to take profits whenever I thought it was appropriate. This worked a lot better for me. I was also comforted to know that if I had at least ten, dollar-weighted positions in my portfolio and used a 10% stop-loss, I would lose, theoretically, no more than one percent of my portfolio's value on any one position. It wasn't the total solution to managing my portfolio, but it was a major step in the right direction.

Although VectorVest OnLine's Portfolio Manager defaults to ten, dollar-weighted positions, it allows you to have up to 100 positions in your portfolio if you wish. If you want to retain the principle of a one percent loss per position, however, you need to adjust the stop-loss percentage. For example, you should use a 5% stop-loss with a five stock portfolio and a 20% stop-loss with a 20 stock portfolio. Generally speaking, risk decreases as the number of positions increases. But there are no free lunches in the stock market. Performance usually goes down as the number of positions exceeds seven. Most money managers, I'm told, wouldn't dream of having fewer than 50 positions in their portfolios. This practice adheres to the rule that you never want to expose more than two percent of your money to any single trade.

In addition to Stop-Prices, Portfolio Manager also allows one to use a variety of other exit strategies. Since the "Rec = S" selection is hard to beat, I always use it first in my back-testing research. If the results are promising, I'll try to get better results with other exit strategies. Various combinations of position sizes, stop-gain and stop-loss percentages often do the trick.

I must confess that I'm still trying to create a practical system of managing top VST stocks that will out-perform the simple approach of rebalancing. You may recall from my previous essays that the less you manage top-ranked VST stocks, the better they perform. No, I haven't cheated and looked at the strategies that have been submitted for "The Chairman's Challenge," a competition introduced on March 24, 2006, but I'm tempted.

If you want to have some fun and maybe win $2,500, try solving the riddle of managing top-ranked VST stocks. My guess is that the answer lies in Using The Right Stop-Prices.

The Case 4 Bull Market Scenario, as described in the Truth Chart, (see my essays of 03/21/03 and 03/28/03), is one in which earnings, inflation and interest rates are all rising. It is by far the most challenging of the eight market scenarios shown in the Truth Chart. In this scenario, the economy is strong, earnings are great, but the day of reckoning is on the horizon. While it is described as the scenario which marks the end of bull markets, Case 4 scenarios can go on for a long time. This one started on May 7, 2004 or 23 months ago. When will it end?

To answer this question, let's examine each of its key factors: Earnings, Inflation and Interest Rates. First quarter corporate profits are expected to rise more than 10% Y-O-Y. Therefore, it seems reasonable to expect stock prices to continue to go up if earnings have been going up. But that's not the way the game is played. Investors worry because they discount the future, not the past. They constantly look for things that may affect future profits and start selling stocks even before earnings actually start turning downward. They want to get out at the top of the earnings cycle and often give false alarms.

That's why we need to be very watchful of earnings data. Our Investment Climate graph of S&P 500 earnings continues to show a steady rise in earnings, but its trend indicator has been essentially flat since last November. This suggests a decrease in earnings momentum, and that's not good. But it's too early to hit the panic button.

Inflation and interest rates have been hitting multi-year highs lately and this has given many investors the jitters. Generally speaking, CPI inflation is not considered to be a serious problem until it reaches 5% or more. It hit a ten plus year high of 4.70% last October, but came down to 3.60% last month. So inflation is getting dicey, but is not dangerous just yet. I'm amazed that high oil prices haven't impacted the CPI more than reported so far, but I have a deep suspicion the number is rigged anyway.

Here's a number that isn't rigged, the Fed Funds rate. It will be a problem if it goes above 5%. It's at 4.75% now and is virtually certain to be raised to 5% at the next FOMC meeting. However, the 90 Day T-Bill, which we track, closed at 4.58% today. The Fed doesn't usually get ahead of T-Bills too often, so they may, just may, stop at 5% for a while. This would be terrific news for stock investors, but one never knows what the Fed will do. My observation has been that they tend to raise interest rates too high and cause recessions. Now that's something to worry about.

If you follow the news, there are a million other things to worry about, but don't pay too much attention to them. Keep your eye on earnings, inflation and interest rates, especially inflation. It will determine what the Fed does with interest rates. This, in turn, will determine the fate of the economy and earnings. Knowing where we're at in this mad scramble is the challenge of climbing The Case 4 Wall of Worry.

If I offered you a list of 20 stocks to buy and said they were virtually certain to make money if you held them long enough, would you buy them? Probably not.

If I said these stocks had a 99% chance of going up in one year, would you buy them? You might think about it.

If I gave you tons and tons of evidence that similar lists of stocks have been going up in price and beating the market for the last ten years, would you buy them? Maybe.

So what's the problem here?

As I see it, the problem is the risk of commitment. Personally, I'd hate to be committed to a fixed portfolio of 20 stocks for a whole year because a lot of bad things can happen in that period of time. Should the market go down, I couldn't stand the stress of watching my portfolio go to pot without trying to do something about it--even if I truly felt it would go up in the future. On the other hand, I can't stand the envy of watching my portfolio underperform the market, should a roaring rally occur. Envy, actually, is less of a problem for me than stress is, but I don't like it very much either. So buying and holding a sacred portfolio of stocks is just not for me. I'll admit it, I'm a control freak.

Herein lies the reason for our contest, The Chairman's Challenge, described in my essay of 03/24/06. I'm looking for a way of making solid profits with high VST stocks without committing to a long-term buy and hold strategy. Yes, I know that rebalancing once a year improves the results of buy and hold strategies, but I want a simple way of buying and selling stocks which lowers my risk of loss and still beats the gains indicated by the buy and hold strategies. This sounds easy to do, but it's not. For example, if I bought the top 20 VST stocks on 01/05/96 and held them until yesterday, I'd be up 308.30%. Not bad. But listen to this. Had I purchased the top 20 VST stocks on 01/05/96 and rebalanced each succeeding year on the first Friday in January, I'd be up 993.82%. Mamma mia!

I've tried eighty ways to Sunday to beat this performance and I haven't done it yet. Maybe I'll get some help from the strategies coming in from The Chairman's Challenge. You may recall that it only has to beat a 198.15% gain since 01/03/03. If the winning strategy doesn't give what I'm looking for, I may just have to learn how to relax and stop being a Control Freak.

ENERGY STOCKS.
Two years ago, April 2, 2004 to be exact, I wrote an essay called "Energize Your Portfolio." I wrote an update last year on 04/08/05. My point was that the party wasn't over. Quick Test shows that the Petroleum stocks were up an average of 41.95% since then. My point again this year is that the party ain't over yet for Energy Stocks.

THE CASE 3 BULL MARKET SCENARIO.
Last week I said that Case 3 Bull Market Scenarios don't last very long. Indeed, it was almost gone by the end of the day. The average value of the CPI and CRB inflation indicators closed at 1.00 last Friday, down from 1.025 in the prior week. So we couldn't say that inflation had reverted back to a rising trend. However, the CRB Index rose from 333.18 last Friday to 337.18 today, causing its trend indicator and the average of the CPI and CRB trend indicators to also go below 1.00. We are now in a Case 4 Bull Market Scenario in which earnings, inflation and interest rates are rising.