On Friday, October 24, 2008, I wrote an essay called "Blue Chip Bargains." It dealt with buying the safest, most undervalued stocks of the highest growth, largest capitalization companies in the VectorVest U.S. database at bargain prices. It also said, "I would be in no hurry to buy these stocks right now. I'd wait at least until the Price of the VectorVest Composite goes up for two consecutive weeks; then I would begin to nibble at the list and I would buy Leaps instead of stocks unless I wanted the cash from dividends and I'd sell Covered Calls against my positions to reduce cost and risk."

So why would I want to buy Leaps instead of stocks and sell Covered Calls against those positions? The answer is to mitigate the uncertainty and incredible volatility we have been facing over the last 15 months. I want to take advantage of potentially rewarding opportunities like buying Blue Chip Bargains, but I don't want to take a lot of risk in doing it. The technique of using Covered Leaps is just one of several ways of "Taming the Tiger." We have demonstrated such techniques on several occasions.

For example, the first "Taming the Tiger" demonstration dealt with a "Safer Way To Short Stocks," and was presented as our "Strategy of the Week" on December 5, 2008. If you're concerned about the risks of selling short, you may wish to see this presentation at the VectorVest University.

The technique of buying Leaps and selling Covered Calls, mentioned above, was illustrated as our "Strategy of the Week" on December 12, 2008. It was called "Taming the Tiger - Part II, and was featured as a "Safe Way to Lock in Low Prices." If you haven't been using it, you may be missing out on some great buying opportunities.

Since selling a Put is mathematically the same as selling a Covered Call, we presented another "Strategy of the Week" on December 26, 2008 which entailed selling Leap Puts of Blue Chip Bargain stocks. We called it "Taming the Tiger - Part III, Raking in Blue Chip Premiums."

A less obvious way of "Taming the Tiger" was demonstrated in our "Strategy of the Week" presentation "VST Mighty Mites" on December 19, 2008. In this case, the high volatility of these stocks required that one employ a large Trailing-Stop setting of 35%. Therefore, only a fraction of the available funds were used to limit the damage a 35% loss on a single stock would have on the overall portfolio. I have used this technique on several occasions in managing the Model Portfolio. If you're buying and selling leveraged ETFs, you'd better know something about Taming the Tiger.

On Thursday, January 8, 2009, the Price of the VectorVest Composite rose $0.07 per share, the Color Guard showed three green lights, and our Market Timing System gave a Confirmed Up, C/Up, signal. Great, a C/Up signal is supposed to indicate that a sustainable rally is underway. But, the very next day the Price of the VectorVest Composite plunged $0.40 per share and it fell another $0.45 per share the following trading day, Monday, January 12th. The rout was on and we got a Confirmed Dn, C/Dn, signal on January 20th, only seven trading days after the C/Up signal. What happened?

The rosy glow of the "Obama" rally from the November 20th bottom was totally obliterated by a devastating Jobs report on Friday January 9th. This bad news was followed by a series of horrible economic and earnings reports which were more than the bulls could stand. Stock prices went down instead of up right after our "long awaited C/Up" signal. Does this mean that our Market Timing System failed?

We judge the efficacy of our system by what it does for us. It has never failed to signal a major move in the market and it never will. We don't predict the market, we analyze it and we follow it. We got the C/Up signal on January 8th, exactly the way the system was designed to do. Yes, the C/Up was not followed by a sustainable rally, but our system identified the turn to the downside very quickly and gave the appropriate guidance. So we got a whipsaw. How often has it happened in the past?

Here's the record:

1. C/Dn on 03/08/96 and C/Up on 03/22/96.
2. C/Up on 07/13/00 and C/Dn on 07/28/00.
3. C/Up on 09/01/00 and C/Dn on 09/15/00.
4. C/Dn on 05/07/02 and C/Up on 05/15/02.
5. C/Up on 04/05/04 and C/Dn on 04/20/04.
6. C/Up on 06/29/04 and C/Dn on 07/14/04.
7. C/Up on 01/08/09 and C/Dn on 01/20/09.

So we have seen seven reversals in thirteen years. Over this time, we have received 56 Confirmed signals. So reversals have accounted for one out of eight calls. Five of these reversals were Up to Dn cases. This is not too surprising since all of them happened in weak, choppy markets. Is this system any good? I think so, but if you can find a better one, use it. In any event, this reversal is The Mother of All Reversals.

Some of our subscribers jumped into Yellow Brick Road stocks last Friday and they are now suffering losses. This should have never happened. Here's why:

When we said on January 8th that, "Prudent Investors should consider buying top ranked stocks from the "Easy Does It - C/Up strategy," we did not intend for investors to buy these stocks under any circumstances. The word consider means to think about carefully, to ponder. The market had gone down sharply the day before we got the C/Up signal and the rally was weak on the day we got the signal. This is what caused us to be tepid in our guidance. Even so, there were other warning signs which should have been heeded.

Never buy into a down market. We have demonstrated this point over and over again in managing the Model Portfolio. The Futures were down going into last Friday's open and the December Jobs Report, which was not as bad as ADP had forecasted, did little to encourage the bulls. The market opened flat to down and by 10:30 AM, it was clear that it wasn't going to be a good day for stock prices. In fact, we closed out of our last position in the Model Portfolio instead of replenishing vacant spots had the rally continued.

Use limit orders. Even if the market had been going up, it would not have been a good idea to buy the YBR stocks at the open. All of these stocks opened sharply higher on Friday, January 9, 2009. Clearly we had moved the market and this is exactly why we usually suggest at least five different searches when planning an entry in the Model Portfolio. I wrote about this issue as recently as October 24, 2008 in my essay entitled, Make Money for a Lifetime. OK, so what could I have done better?

Elaborate. Brevity may be the soul of wit, but our job is not to be witty but to be clear and explicit. Henceforth, I will try to communicate my thoughts more completely. Simply saying "consider" instead of "buy only if the market is moving higher" did not provide adequate guidance. Everyone should know that we are trend followers and that we plan to trade in accordance with the trend. Therefore, we will not make a trade if the market is moving counter to the perceived trend. While we advocate buying rising stocks in rising markets, both the stock and the market must be rising when we make the trade.

Do not make predictions. The worst thing an investor can do is let predictions influence their objectivity. For example, I expected the market to rally into the Obama inauguration and I know I shouldn't have done that. Predictions cloud one's objectivity and I found myself cheering for the rally instead of responding to its recent weakness unemotionally. That's too bad because cheerleaders don't make money. I know that, so it's a Lesson Re-Learned.

Our Market Timing System gave a C/Up signal yesterday and we said that, "Prudent Investors should consider buying top ranked stocks from the Easy Does It - C/Up strategy located in the Yellow Brick Road folder in the UniSearch Tool." What is that all about?

As noted in my essay of October 3, 2008, "The Yellow Brick Road" is a trading system which allows investors to make money in both up and down markets. It is easy to use, does not demand a lot of time and can be done at night when the market is closed. The Yellow Brick Road uses two strategies: "Easy Does It - C/Up" for going long on Confirmed Up signals and "Easy Does It - C/Dn" for going short, if one wishes, on Confirmed Dn signals. These strategies were illustrated on September 26, 2008 and October 3, 2008. An excellent "Strategy of the Week" presentation, showing the complete "Yellow Brick Road" process, was made by Ms. Angel Clark at the VectorVest University on October 3, 2008.

With all the economic and political turmoil going on around the world, it will be a fitting test to see if we have the brains, heart and courage to achieve financial freedom via The Yellow Brick Road.

HOPE VS REALITY.
I had a long conversation this morning with a Wall Street Journal Reporter regarding our Confirmed Up signal. He, of course, is acutely aware of all the problems currently facing investors and wanted to know what would support a "sustained rally" as indicated by the Confirmed Up signal.

I told him essentially what I said in last week's essay: Investors want hope and President-Elect Obama will give it to them. Mr. Obama has been carefully laying the ground work for his presidency with his comments on the severity of the recession, the huge amounts of money he needs to spend and the long time it will take to get the economy going again. While he admits he doesn't know for sure that his remedies will work, he exudes confidence in what he is doing. Great leaders know what to do and how to do it. So far, we are only learning about what Mr. Obama plans to do.

Nevertheless, investors are going to focus on the potentially profitable opportunities arising from Mr. Obama's programs then they will look beyond the dreadful economic news we're getting every day. This should give the market a lift at least to inauguration day. It's like the old game of buying the rumor and selling the news. Except this time it's Hope vs. Reality.

WHY YOU SHOULD LEARN TO TRADE OPTIONS.
A long-term subscriber at our Tampa Seminar told me that Rambus, RMBS, was in another patent suit and the results of the trial were imminent. The decision could move the stock price up or down, big time. I asked if he was buying a Straddle. A Straddle is an Option trade that allows you to make money whether the price of the stock goes up or down...the more it rises or falls, the better.

This isn't the first time we have encountered an opportunity such as this with Rambus. On February 20, 2004, I wrote an essay regarding an earlier Rambus court decision called the "The Perfect Straddle." This essay described how Straddles work and an associated "Strategy of the Week" presentation showed how one could have made $6,290 in two days on very little investment.

Today is déjà vu all over again. Rambus closed down $7.26 per share on a ruling against them. Making money like this is Why You Should Learn To Trade Options.