Every VectorVest subscriber should know that portfolios of top-ranked VST stocks make money and beat the market over 95% of the time. Even better, if one were to buy, say, the top 15 stocks ranked by VST-Vector, sell them after one year and repeat the process year after year, they would be virtually certain of making money and outperforming the market by a wide margin. Our "Strategy of the Week" dated December 9, 2005 and March 24, 2006 illustrate this technique in mouth-watering fashion.

There's only one hitch. You have to have the intestinal fortitude to stay with the strategy through gut wrenching market corrections. Personally, I can't do it. So I asked for your help in my essay of March 24, 2006. I called it "The Chairman's Challenge." The challenge was to find a practical way of managing a portfolio of top ranked VST stocks that would out-perform the strategy illustrated on 03/24/06, while reducing the pain of deep draw-downs. The first place winner would receive a check for $2,500. Second and third place winners would receive $1,250 and $625, respectively.

This challenge was a lot more difficult than it sounds. Only 39 qualified entries were submitted that beat the 198% gain shown in our 03/24/06 "Strategy of the Week." Moreover, most of the entries were not actively managed portfolios, but a variation of our basic rebalancing technique. Nevertheless, some truly outstanding results were obtained.

The Third Place Winner is Mr. Ariel Rosenfeld, of Kfar Saba, Israel. His entry showed a gain of 317%, a max drawdown of only 21% with 55% winners. Mr. Rosenfeld's entry used the Primary Wave to determine which exit to use. When the Primary Wave was Up, he used a 26-week hold as an exit. When the Primary Wave was Dn, he used a 26-week hold or VST trending lower for five days as an exit. We tested this strategy during the period 01/05/96 to 01/03/03. It showed a minus 6% return with a max drawdown of 50%.

The Second Place Winner is Mr. Bruce Gillett, of Lamone, Maine. His entry achieved a gain of 346% with a max drawdown of 24% and 78% winners. Mr. Gillett bought and held 15 stocks for the first six months, then he used the % Buys to determine whether to be in or out of the market as follows: If % Buys < 25%; then buy 15 stocks and hold until the % Buys > 35%. Stay in cash until the % Buys < 25%. Although this strategy brings an interesting market timing sequence into play, it showed only a 60% return and 42% max drawdown over the 01/05/96 to 01/03/03 time period. It is featured as this week's "Strategy of the Week." Make sure you see it demonstrated at the VectorVest University.

Now, how do I feel about these entries? Well, they certainly beat the pants off of the 198% gain we showed on 03/24/06, but they didn't beat our basic rebalancing strategy, which gave a 323% gain and max drawdown of 35% over the 01/05/96 to 01/03/03 time period. Moreover, neither entry solved the major problem of mitigating major draw-downs. So I'm still looking for something a chicken like me would use. Hopefully, the First Place Winner's entry, which we'll reveal next week, will do the job. Until then, let's give some credit to Mr. Gillett and Mr. Rosenfeld for producing The Chairman's Challenge Runners-Up.

We had a great show here in Las Vegas and I especially want to thank those subscribers who visited our booth and showed their support. While it is quite normal for this to happen, the number of you who appeared and the sincerity of your voluntary testimonials are especially appreciated. Thanks again for your help.

Show attendees who were new to VectorVest were amazed at the speed with which we went into cash and subsequently went short. Once we explained how our market timing system works and how the RT, BSR and MTI were losing momentum since late January, early February, they all said they wished they had known about VectorVest sooner. Of course, they asked a lot of questions such as, "How far down will this pull-back go and how long will it last?" No one knows for sure, but we can get an idea from the previous behavior of the BSR. I wrote about this key indicator on October 21, 2005, and it suggests to me that this downturn will not end until the BSR consolidates below 0.20. You can see how reliable it has been in the past by studying the Market Timing Graph.

I am not shocked by the severity of the sell-off so far. After all, the market had been moving higher for over three years and it had assumed some of the characteristics of the early 2000 market, i.e., the BSR was falling while the Price of the VectorVest Composite was rising. This phenomenon indicated that investors were focusing on fewer and fewer stocks and pushing prices higher and higher, creating a dangerous situation. In early 2000, the top Business Sectors ranked by RT included Electronic, Telecomm, Software, Drug, and Internet. As of May 10, 2006 the top Sectors included Steel, Mining, Metal Products, Petroleum and Energy. High flying stocks in the top ranked Business Sectors got demolished in 2000 and they also have so far in the current drawdown.

A big difference between 2000 and now is that the market was terribly overvalued in 2000 and now it is fairly valued. So I see this drawdown as a correction, not the beginning of a bear market. Besides, we have to see evidence of falling earnings to engage a bear market scenario. We will inform you when this happens. However, I am very concerned about the falling dollar. A weak dollar will lead to higher inflation as sure as night follows day. A barrel of crude oil, for example, would now cost closer to $50 instead of $70 had the dollar not fallen over the last four years. Moreover, the Fed is less likely to stop raising interest rates as the dollar falls in value.

On a lighter note, I saw that the casinos have been replacing slot machines with all types of gaming tables. Other people, as well as I, obviously want to be involved when losing their money. Finally, the cost of doing Vegas has gone up. It's getting hard to find a $5 blackjack table and food and beverage prices have shot upward. Nevertheless, I still love this place. That's my Report From Vegas.

NO MO MOJO.
We went short with "Sector Peak - Short" strategy on Wednesday. While it worked out well yesterday, I must admit that I am very uncomfortable shorting high VST stocks. These guys can skyrocket at any time and are rebounding today. So I have created a strategy for finding high momentum stocks of lower quality. It's called "No Mo MoJo." Log onto The VectorVest University to see how it works.

One of the nice things about my job is that I get to go to Las Vegas fairly often. I really like Las Vegas. It has a dynamic atmosphere that exudes energy and merrymaking. Indeed, it's a perpetual carnival.

I don't gamble much when I'm in Vegas, so why do I like being there? First of all, I enjoy talking stocks, demonstrating VectorVest and meeting with our customers at The MoneyShow. Beyond that, I enjoy seeing the sights and going to great restaurants and shows. Actually, I wonder about the throngs of people coursing around the place who feel they must gamble to have fun. Not that I don't like a good poker game, but gambling isn't that much fun for me. It leaves too much to chance.

My dear wife loves to play the slots. I find them terribly boring. The problem is that I just can't just sit there, push a button and see what happens. I have to be involved in the outcome. Yes, I would be somewhat involved in a game of blackjack or poker, but that's still not good enough. I like playing the stock market where I can buy and sell whatever stocks or options I want, whenever I want. With stocks I can plan strategies for getting in and out of trades and decide ahead of time how much I want to put at risk. I can even use options to hedge my risk if I wish. I like the control I have over my portfolio and I just don't have to depend on luck so much to make money in stocks.

Several years ago, I wrote a pamphlet called "The Guide to Worry-Free Investing." In it I said, "You don't have to take major risks to make a lot of money in the market. Does that sound impossible? Not if you learn to minimize downside risk, spread it and limit it. The way to minimize downside risk is to buy high VST-Vector "B" rated stocks with RS values above 1.00. The way to spread risk is to diversify, diversify, diversify. Diversify in what you buy and when you buy. Do not put more than 10% of your funds into one stock. Do not own more than two stocks in the same industry. Do not plunge into the market all at once. Spread your investments over time. The way to limit risk is to use Stop-Prices. Once a Stop-Sell Price has gone above your purchase price, you should not lose money on that stock."

To these little gems, I could add that you should not buy stocks going down in price and do not buy stocks in a down market. There are many more things you can do, but you get the idea. With stocks, you can Make Your Own Luck.

Dr. Alan Greenspan, former Chairman of the Federal Reserve Board, was a master at obfuscation. He could answer any question regarding monetary policy and interest rates and not say anything you could understand. Many observers thought he deliberately spoke in circles to avoid signaling his intentions. This probably was the case when he took office in August 1987, because that was the way the Fed operated in those days. Over the last several years, however, he took steps to make the Fed more transparent and tried to communicate his thinking more clearly without committing to any specific course of action. In over 18 years on the job, he was never blind-sided.

Now comes Dr. Ben Bernanke, the new Chairman of the Fed. He was expected to be a straight-shooter who spoke in no uncertain terms. Many observers, however, were concerned that he might be too candid and rock the financial markets unnecessarily. These fears were allayed somewhat after he handled himself well in each of three Congressional hearings and was praised for the clarity of his answers. Indeed, investors have been waiting for months for any sign that the Fed would stop raising interest rates soon, so the stock market rallied strongly on Thursday, April 27th when Dr. Bernanke told Congress that the Fed could "pause" it's tightening to assess the economic and inflation outlook. No one seemed to pay any attention, however, when he added that "a decision to take no action at a particular meeting does not preclude actions at subsequent meetings."

On Monday afternoon, May 1st, the market was in a modest rally when CNBC anchor, Ms. Maria Bartiromo, dropped her little bomb. She announced that Dr. Bernanke had told her at a White House dinner that investors and the media had misconstrued his testimony to Congress regarding a "pause" in interest rate hikes. She claimed that Bernanke said the market was wrong to think the Fed had turned dovish on inflation and that the Fed was done raising rates. Of course stock prices fell after that, and Dr. Bernanke's honeymoon was over.

Criticism of his Saturday evening indiscretion came from every side. Although I believe he is, in fact, a straight-shooter and everyone knows that he favors "inflation targeting" and has repeatedly said that economic and inflation data will determine his decisions, he has to learn to Never Trust A Pretty Face.