The financial theme song for 2008 should be Stephan Sondheim's poignant ballad, "Send in the Clowns." It was written for the musical, A Little Night Music and it was sung by a 40 something actress who was rejected by a former lover. Overcome by regret, sadness, self-pity and anger, she sings the song, "Send in the Clowns." It ends with the desperate lines:

But where are the clowns
There ought to be clowns
Well, maybe next year.

"Send in the clowns," is a theatrical term used when things haven't been going well. In other words, the clowns are supposed to liven up the act. For millions of investors, things certainly have not gone well in 2008 and they definitely would like to liven up their portfolios. In 50 years of investing, I have never seen such massive, wide-spread loss of wealth. It is sad, indeed, but what can we do about it?

Surely, regret, sadness, self-pity and anger doesn't do any good. So one needs to examine what went wrong, learn from adversity and get better. I can say this from experience because I grew up during the depression, made a lot of financial mistakes, and faced adversity on many occasions. The key is to identify the root causes of one's adverse experiences and take corrective action to get better. I'm not going to go off on a tangent here, but I've learned more from my mistakes than I ever did from my successes.

The problem most investors face is that it's not easy to identify the root causes of one's failures. The reason is that much of what Wall Street has taught us about investing is wrong. It's not all wrong, of course, but that makes it even harder to know what one has done wrong. To see what I mean, let's consider the recent Business Week article, "Back to Basics," (pg. 44, 12/29/08), written by Mr. Christopher Farrell. It says that while many investing mantras, e.g., the investing trinity of diversifying, buying and holding stocks, and dollar-cost averaging, have been ineffective over the last decade, the old proverbs that preach diversification and dollar-cost averaging remain good advice for anyone investing for the long haul. Well, let's take a look at these items one at a time.

Diversification has not been shown to be ineffective over the past decade, so I continue to believe that it remains good advice for anyone's investment strategy. Buying and holding stocks is a flawed strategy. The fact that stock prices are back to 10-year lows is a sordid reminder of that. Dollar-averaging has indeed been ineffective over the last ten years and it is not good advice for anyone. Since it entails buying stocks going down in price, dollar-averaging is a sucker's game.

Legendary money manager, Bill Miller, destroyed his reputation as a premier fund manager by buying Citigroup, AIG, Freddie Mac, Wachovia, Bear Stearns, Washington Mutual, Countrywide Financial and other stocks as they were getting crushed. His fund dropped 58% this year and he now says he's working on new strategies to improve performance. Mama mia, Send in the Clowns.

P.S. For more information on dollar averaging, please click on Views, VectorVest Views, then click on Search Views at the top of your screen, type dollar averaging in the Search Text box; then click on Search at the bottom of your screen. You may also search for dollar averaging in our Blog at www.vectorvest.com.

Bush's $14 billion auto bailout? Baloney. Blagojevich's senate seat auction? A choir boy gone bad. A negative CPI? Japan, here we come. Zero interest rates? Japan, here we are. Bernie Madoff's $50 billion dollar Ponzie scheme? Now that's news.

Bernard L. Madoff's name has dominated the financial news since he was arrested last week. And the finger pointing has begun. How could he have possibly gotten away with such a blatant scam for so long? Where was the SEC? Mr. Christopher Cox, Chairman of the SEC, says he too would like to know the answer to that question. So he has launched an investigation. Yes, Mr. Cox said that several credible warnings of wrong doing were ignored by the SEC and he wants to know why. The Wall Street Journal reported (pg. A1, 12/18/08), that "Harry Markopolos - who once worked for a Madoff rival," spent nearly a decade trying to convince the SEC that Mr. Madoff's returns, (12 %/yr., year-after-year with nary a drawdown), were too good to be true." In 1999, Mr. Markopolos wrote a letter to the SEC, claiming that "Madoff Securities is the world's largest Ponzie Scheme."

Like every other government agency, the poor, little old SEC was too understaffed and overworked to pay much attention to Mr. Markopolos. Yet, its examination and enforcement staff had grown to nearly 2,000 people with a budget of more than $900 million since the Enron debacle. So the clamor for more staff, more money and more regulation is on again in full force. Will that eliminate fraud and deception?

I don't think so, but there are lessons to be learned. Mr. Steven Pearlstein, business columnist for the Washington Post writes, (The Charlotte Observer, pg. 4D, 12/18/08), that, "The solution is obvious. Turn these firms into something akin to a regulated public utility." Oh, me. It sounds like this guy has been living in Washington too long. Mr. Daniel Henninger, highly regarded columnist for the Wall Street Journal writes, (pg. A17, 12/18/08) that, "The Vosey Inheritance, a play by Harley Granville-Barker, 1914, should be on Broadway or on television. Why? To learn a few things about money that we manifestly do not wish to know."

Hmm. Do you think that maybe some of Bernie's clients knew what was going on and didn't want the music to stop? I don't know, but I do feel sorry for those who didn't know what was going on and lost their fortunes. No one should go through that, but you can't count on government bureaucrats to protect you. Learn how to protect yourself. One of the easiest and best ways to reduce risk is given in my Special Report, "Guide to Worry-Free Investing." It is to diversify in what you buy and when you buy. Do not put all your eggs in one basket. Do not bet the farm on a single trade. These are the lessons, old lessons, to be re-learned from The Madoff Take-A-Way.

P.S. For more information on mitigating risk, please click on Views, VectorVest Views, then click on Search Views at the top of your screen, type Asset Allocation in the Search Text box; then click on Search at the bottom of your screen. You may also search for Asset Allocation in our Blog at www.vectorvest.com.

AMAZING RACE.
Two weeks ago, I wrote a snippet about how much I like the QuickFolio tool in VectorVest RealTime. This week, I was actually shocked by what it showed me. Here's what happened.

On Tuesday, 12/16/08, I prepared a QuickFolio of each of the five Strategies identified in that night's Views. The next morning, Wednesday, I was sitting at my computer, looking at these portfolios in V V RealTime and waiting for the market to open. It was like sitting at the track waiting for the horses to break out of the gates. Well, the opening bell was rung and our portfolios began to move. Apparently investors were having a hangover from Tuesday's celebration because our portfolios weren't doing so good...except for Jubilee, that is. It shot out of the gate and never looked back. At one point it was up over 17%. Yesterday, a down day for the market, the Jubilee portfolio I created on Wednesday night was up again, big time...over 11%. Today's Jubilee portfolio didn't do so hot, but Langer's Longs was up 5.41%. At 10:47 AM it was up 7.79%. We got in at 10:15 AM when the NASDAQ was up 2%. Imagine how much money you can make by placing your bets on this Amazing Race.

At 26 weeks, the current downturn, which was signaled by a C/Dn on June 11, 2008, is the longest we have recorded in the VectorVest U.S. database, which goes back to June 1995. In fact, it's the longest downturn we have encountered since going into business in January 1988. When is it likely to end?

Well, I really can't answer that question, but I'll know it when I see it. I'll know it because our Market Timing System will give a Confirmed Up, C/Up, signal at that time. In order to get the C/Up signal, the Price of the VectorVest Composite must go up, week-over-week, on any given day for two consecutive weeks and the Buy/Sell Ratio, BSR, must go from below 1.00 to above 1.00. The beauty here is that we can see this signal develop as it happens.

The first step in this process is that the Price of the V V C must go up week-over-week for a single week. This event is noted in our Daily Color Guard Report by saying that the Primary Wave is Up, and the Up signal is then logged into the Trend column of the Color Guard Report. If we access the Timing section of last night's Views, we can see that the Primary Wave was Up on November 26th and 28th, and it has been Up for the last four days. As I write this essay, the Primary Wave is Up by a scant 10 cents per share. Nevertheless, five consecutive up days is very encouraging. Moreover, we could also see a couple of Green lights in the Price column.

The next significant step is to see the Price of the V V C go up week-over-week on any given day for two consecutive weeks. When this happens, we say that "The Price of the V V C has given a preliminary signal of a sustainable uptrend." If you look at our Market Timing Graph in the Weekly Mode, you'll see that a string of five consecutive Up weeks started on July 18, 2008. So I checked the Strategy section of the July 25, 2008 Views to see if we had properly documented the two week signal. Sure enough, these very words were there for all of the world to see.

Things appeared to be going pretty well with the incipient rally and our Market Timing Indicator, MTI, was even bold enough to close above 1.00 on August 11, 2008. But all was not well. The BSR was at a lowly level of 0.58 and it needed to go above 1.00 to confirm the rally. Moreover, the traditionally tough months of September and October were looming ahead. So what's all this got to do with what's happening now?

Right now I'm seeing shades of 1990. You may recall that the market peaked in July 1990 and the economy was in the tank due to rising interest rates. In addition to that, the banking industry was losing tons of money on foreign loans and the U.S. government was spending $200 billion trying to recover from the S&L Crisis. Finally, Saddam Hussein invaded Kuwait on August 2nd, threatening our oil supplies and caused stock prices to plunge. The BSR crashed to the lowest level, 0.04, I had ever seen in the short history of VectorVest.

Around the end of October an amazing thing happened: The BSR started to go up. It seemed crazy. With all the problems facing investors, why would stock prices be going up? We could ask the same question today. Whether we know the answer or not, the BSR has begun to rise again. It closed at a 48-day high of 0.10 on Wednesday, December 10th. Now that's not very high, but it is a good sign.

Other good signs are that the Price of the V V C closed above its 40-Day Moving Average on Wednesday, December 10th, and the MTI also closed above 1.00. Altogether, I'd say we're seeing Signs of a Revival.

TAMING THE TIGER - PART II.
We could get a signal of a sustainable rally as early as Monday's close. Are you prepared to buy great stocks at bargain prices? Can you cope with the volatility? Can you handle the risk? Never fear. Todd Shaffer is here. He will show us how to lock in the right time to purchase great stocks with relatively small cash outlays and minimum risk. Visit the VectorVest University to see Mr. Todd Shaffer's intriguing "Strategy of the Week" presentation, "Taming the Tiger - Part II."

We missed a great buying opportunity a week ago Monday and I'm not happy about it. You may recall that the Price of the VectorVest Composite got crushed on Wednesday, November 19th and Thursday, November 20th. Fortunately, the Model Portfolio was long with some high-volume Contra ETFs, so we were feeling no pain. The Price of the V V C was also down sharply on Friday, November 21st, until it was rumored that Mr. Timothy J. Geithner was to be recommended as the next Secretary of Treasury, sparking a monster reversal on huge volume. We went into cash on that rally and noted that "we are looking for a new short-term trend to develop." Why didn't I prepare you for the possible follow-through rallies that occurred on the next five days?

The reason is that I had simply become so hidebound by all the rules, procedures, conditions and restraints that we were applying to managing the Model Portfolio, that I wasn't using my head anymore. That was crazy. If I want to make big money in this market, I've got to recognize and move quickly to take advantage of great opportunities as they occur. This is what I intend to do in the future. Rules are nice, but "He who hesitates is lost." From now on I'm going to do my best to Seize the Moment.

QUICKFOLIO.
Day traders love high volatility. It gives them opportunities to quickly make huge profits. So they love what most of us hate: big, fast price movements. As far as I know, most day traders have a WatchList of volatile, high-volume stocks that they watch like a hawk. While every trader has his or her special way of playing the game, many of them live and die trading support and resistance levels. I have found this technique to be tedious, so I look for movers and shakers another way.

I use a tool in VectorVest RealTime called, "QuickFolio." It allows me to create a portfolio of stocks and track their performance from the Opening Bell with just a few clicks of my mouse. For example, I ran our "Buying Contra ETFs" strategy as of last night's close and made a QuickFolio of the top five stocks ranked by AvgVol Desc. VectorVest RealTime actually began tracking this portfolio's performance as of 8:00 AM this morning.

What I really like to do is create a variety of QuickFolios of stocks on any given day and see how they break out of the gate. Then I'll cherry pick my trades from stocks in the best performing up or down QuickFolio.

TAMING THE TIGER.
While day traders may love volatility, investors who can't sit at their computers all day hate it. So how do they make money in this jungle of a market? They execute low-risk trades by hedging their bets. Let's say, for example, that you wanted to short some stocks, but were fearful of explosive up moves that could hurt very badly. To protect yourself, you hedge your short stock positions by buying out-of-the-money Call Options. Imagine, receiving substantial credits to your account by shorting stocks and limiting your risk with relatively low-cost Call Options. To see how it's done, visit the VectorVest University to see Mr. Glenn Tompkins' outstanding "Strategy of the Week" presentation: "Taming the Tiger."