We have been receiving a lot of questions regarding our Model Portfolio, so I'll try to answer them in this essay.

Q. What does VSA stand for?
A. This notation goes back to 1988 when we launched our first product, The VectorVest Stock Advisory. This product was in the form of a little blue book and was delivered by mail. Although we stopped publishing the little blue book in 1998, we still use the term, The VSA Model Portfolio.

Q. How do you pick the strategies you use?
A. The answer to this question was given in detail in my essay of 12/23/05. It was also demonstrated as "The Strategy of the week" on 09/01/06 and 09/15/06 at The VectorVest University. If you're serious about finding the best strategies, you've got to read my essays of 11/22/02, 03/18/05 and 12/23/05, see the demonstrations at the VectorVest University, see how it's done on CD No. 4 of the current Seminar CD Set, or attend a live VectorVest Seminar or Review.

Q. What is your exit strategy?
A. Basically, we have been using a 5% stop loss. Yes, I know this is usually a far cry from the Stop-Price shown by VectorVest, but you must remember that "Riding-the-Wave" is a volatile, high momentum strategy, not a buy and hold. We also try to retain profits when we can and exit a winning position if it has one or two bad days. There's no sense in seeing a profit turn into a loss when a stock begins to go the wrong way.

Although we now reserve the right to exit any position at any time, I will still allow the portfolio to take a beating if the market surprises us. A good example of this happened on May 11th of this year. I did not expect the sharp sell-off that followed the market's mild reaction to The Fed's interest rate increase on May 10th so I did not sell any stocks that day. Had we prepared you better for this sell-off on May 10th, I certainly would have gone into cash on the 11th.

Q. Why do you trade low-priced stocks so much?
A. Simply because they often give the highest percentage gains. I do recognize, however, that the volatility of low-priced stocks may be disconcerting and I plan to reduce our use of these strategies.

Q. Why aren't you more specific about what you are doing or going to do?
A. For many years, I was very specific about what I was going to do and the results were disastrous. For example, if I said we were going long tomorrow with XYZ strategy and the market went down instead of up, I felt obligated to go long and the portfolio would get slaughtered. Even if the market went up as expected, I would find that the stocks I had intended to buy were already marked-up in price, sometimes as much as 30 to 50%, making it extremely difficult to make a profit. In fact, the only guys making any money in this deal were the market makers. I don't see our stocks moving ahead of time since I'm giving you a choice of five or six strategies I might use if the market suited my expectations.

Q. What do you plan to accomplish with the VSA Model Portfolio?
A. My hope is that it will help you make money in the market. I prefer that you try not to follow the model portfolio, but instead, get ahead of it. I want you to learn enough about trading to beat me to the punch. We do not enter new positions before 10:30 AM unless we see an especially strong move developing, up or down. Nothing makes me feel better than to hear someone say I picked a better strategy than you did, or I got a better price than you did, or I got out before you did or I'm beating the pants off of the VSA Model Portfolio.

Last week I wrote about how I use Stock Viewer and I said I always look at the corresponding graph of each stock. Implicit in that process was the notion that I was looking for stocks that I might buy. Now that's a pretty easy thing to do. I simply prefer stocks with smooth, rising price patterns and steadily rising forecasted earnings.

Of course I would always like to see the same things in the stocks I own, but for some reason, that's not what always happens. So I'm faced with the task of deciding what to do with each stock, every day. Should I sell it? Hold it or maybe even buy more? The decisions I make depend upon a lot of things and graphs play an important role in making them. Take Starbucks, SBUX, for example. Here's a stock I fell in love with a long time ago, so I bought it. I know, you're not supposed to fall in love with a stock, but I did, and it's given me fits from time to time. I see it's down $2.53 a share as I write this essay, so am I going to sell it? I don't think so.

I explain why I'm not inclined to sell it as we look at some graphs. Take a look at SBUX's All Weekly graph. Set it up so that you see only Price data in the upper portion and the Comfort Index, CI, in the lower portion. You can see immediately that SBUX has gotten very volatile over the last few years. Although it has always been more volatile than I would have preferred, its CI was holding up quite well. Now, however, its CI has weakened substantially. So it's not a stock I would buy at the present time. But why wouldn't I sell it?

Replace CI in the lower portion of the graph with EPS. EPS has gone from $0.05 per share in June, 1995, on a split-adjusted basis, to a current level of $0.88 per share. That's a factor of 17.6. Its' Price has gone up by a factor of 19 over the same time period. This similarity in Price and EPS increases is not a coincidence. So SBUX has a great track record, and I expect it to continue doing well. But how does one live with the volatility?

Let's look at a Standard two-year daily graph of SBUX. Note that SBUX's Price fell below its Stop-Price on a few occasions over the past two years and bounced back each time. So why didn't I sell it on those occasions? Other than being in love with the stock, I have another way of handling this situation. Take the Stop-Price off the graph and add a 20-day Price MA to the upper portion. Now when I see the 20-day MA cross below the 40-day MA and the RT go below 1.00, I'll sell Covered Call options to mitigate the downside loss. I'll buy the Call options back if they haven't expired before the 20-day MA crosses above the 40-day MA and RT goes above 1.00. The sequence of SBUX Covered Call sell and buy dates for the past two years is as follows: Sell 01/26/05, Buy 04/06/05, Sell 04/11/05, Buy 05/17/05, Sell 07/07/05, Buy 10/15/05, Sell 05/18/06, Buy 07/05/06, Sell 07/20/06, Buy 09/20/2006.

SBUX's Price may have peaked for now, so I'll just wait and see if the 20-day MA crosses downward through the 40-day MA. If it does and RT goes below 1.00, I'll sell some Covered Calls and use the credit I receive to buy some Free Coffee.

You have probably heard the story about the guy who was called in by the IRS to have his tax return audited. When he showed up at the IRS's office, he carried two large shopping bags of check stubs, receipts and stuff and dumped them on the auditor's desk. "Here," he said, "you figure it out."

The stock market operates in the same way. It emits a blizzard of data every day which comes in a random, helter-skelter way. Most of it is totally meaningless or unimportant to us as individuals. Some of it is vitally important. We have to figure out which is which. Of course there are hundreds, if not thousands, of experts who claim they have the answers we need. So we get another blizzard of theories, analyses and interpretations of what the data mean. Then we get the forecasts and recommendations derived from the former data, theories, analyses, and interpretations. Half the time, the stuff we hear, see and read is dead wrong and/or misleading. So how can we separate the good advice from the bad?

I use VectorVest. VectorVest is designed to conduct a factual, objective analysis of stock data and transform it into information and guidance. All of this information and guidance is stored in Stock Viewer.

Stock Viewer is a gold mine. Our job is to find the gold contained therein and extract it. This is not hard to do. I simply access Stock Viewer and examine the top 20 stocks ranked by VST-Vector. I look at the graph of each and every one of the top 20 VST stocks, every night. In my essay of 12/03/04, I described what I look for in a graph, i.e., a nice steady pattern of rising prices. I also like to see smooth, steadily rising EPS patterns. You could hardly go wrong buying stocks with steadily rising earnings.

Stocks with the best EPS patterns have high RS ratings. So the next thing I do is sort by RS and look at the graphs of the top 20 RS stocks. In this case, I especially like to look at the "All Weekly" graphs to examine the long-term of earnings performance of these great stocks. EPS is the engine that keeps a stock's price going higher and higher.

To find stocks with the smoothest Price performance patterns, I'll sort by Comfort Index, CI. I've relocated CI on my Stock Viewer screen to be between VST and GRT. In this way, I know exactly what to expect when I look at a Standard graph of a stock. If the CI is high, above 1.50, I'm going to see stocks with smooth, rising Price performance. I won't look at a stock's graph if the CI is low, below 1.00, unless I'm bottom fishing or thinking about shorting the stock. I especially like to look at graphs of high CI stocks that are less than $10.00 in Price.

I'll always sort by $Change to see what's going on with the big boys. Hmm, yesterday was a big day for gold. GDM was up 44.84 and HUI was up 13.55. The graphs show that both stocks bottomed in early October and seem to be making good moves. The Oil Index, XOI, is moving right along with them. Is this a coincidence?

Speaking of big moves, the next thing I'll do is sort by %PRC. In this case, I'll be looking at very low-priced stocks with the largest percent price changes. Most of these stocks are pretty awful, so I'll only look at "B" rated stocks. Note that as of yesterday, Thursday, November 9th, the top three "B" rated stocks were rebounding from long downturns. The next two were exploding higher. Hey, Trio-Tech Int'l, TRT, up 20.87%, is in our Summer Hiatus Portfolio. Go man, go! The next "B" rated stock on this screen, Dana corp., DCNAQ, may be coming out of its grave.

Next I'll sort by DY. Oh, do I love this sort. Take a look at Morgan SDW EEu, RNE. It's a high income Closed-end Fund selling for $36.66 a share and paying an $11.43 dividend for a juicy 31.18% yield. The graph shows it was as high as $53.60 before the May drawdown and is now rising from a $28.82 bottom. One of the things I like to do with this sort is find high yielding, optionable stocks. So I'll buy the stock and sell at-the-money Calls against it. That way I'll collect the fat dividend from the stock and the premium from the short Calls. Managing this trade is not as easy as it sounds, so be careful if you want to try it.

There's more that I do with Stock Viewer and a whole lot more I can share with you. For now, however, that's How I Use Stock Viewer.

One of the first things an options trader should do when assessing a possible trade is to properly determine its downside consequences. I didn't do that last week when I exampled the Google Call Ratio Back Spread. I'm embarrassed by the stupid mistake I made and I apologize for it.

The example I showed last week said the old man could have shorted 20 GOOG Dec 400 Calls @ $37.80 and purchased long 30 GOOG Dec 430 Calls @ $20.90. I said the maximum loss for the trade would occur at an expiration stock price of $410 per share. This was not correct and it was a stupid mistake to make because I know that the maximum loss on Call Ratio Back Spreads always occurs at the Strike Price of the long Calls. Moreover, I could have and should have figured out the maximum loss in my head. I know that the long 430 Calls would expire worthless if GOOG closed at or below $430 on 12/15/06. This would result in a loss of $62,700. If GOOG did close at $430 at expiration, the short Calls would have a value of $30.00 per share for a gain of $15,600. So the net loss would be $47,100 and not the $6,750 cited in the example. So what looked like a good trade really wasn't very good at all.

I can go into great detail on how I botched last week's example, but your time would be better spent if we showed you that Call Ratio Back Spreads are really worthy of your consideration. So I've asked the good people at the VectorVest University to demonstrate a Call Ratio Back Spread strategy as this week's "Strategy of the Week." They will be using the VectorVest Options Analyzer in this demonstration, and it is a wonderful tool. But it will only do what you instruct it to do. It can't think for you. It will present the risk profile to you for any trade you construct...even if you make a mistake. So don't be lazy like I was. Always use your head to Check The Numbers.

DOUBLECROSSERS.
Income tax rates were confiscatory here in the U.S., back in 60's and 70's, so buying tax shelters became the thing to do. The politicians passed laws to encourage high wage earners to invest in socially desirable areas with so-called "tax advantaged" investments. So what was there to worry about? Then Mr. Reagan became President and he wanted to cut income tax rates. In order to do so, he made a deal with Congress and agreed to change the law on tax shelters. Yes, we got the lower tax rates Mr. Reagan promised, but a lot of people with tax shelters got shafted. Even worse than losing their original investments, they also were faced with the obligation of paying taxes on phantom income. I, for one, felt betrayed.

Now the Canadian government seems to be doing the same thing. They passed laws about five years ago to create the so-called income trusts to encourage investors to purchase Canadian stocks. Companies operating as trusts pay very little income taxes, but pay most or all of their operating income to their unit holders as dividends. These trusts became very popular since they paid high dividend yields and still offered the potential of substantial price appreciation.

According to Thursday's Financial Times, 255 trusts listed on the Toronto Stock Exchange lost a tenth to a fifth of their value when news was released that the government had decided to revise the rules so that income trusts would begin paying the conventional corporate tax rate. A four-year transition period would apply to existing trusts. Big deal. The damage has been done. Doublecrossers.

P.S. Even with this low blow, I still like a lot of Canadian stocks. One of our current top ranked VST stocks, PineTree Capital, continued to soar in price. It hit the top five VST stocks on October 13th at $10.49 per share and closed today at $15.89.

Special Note: The information cited in the above overview, "Doublecrossers," was taken from VectorVest Canada.