We have received some feedback lately alleging that VectorVest has become a bunch of day traders and we've drifted away from our roots. I'm sorry if we have given that impression, but we still believe in buying safe, undervalued stocks, rising in price.

The essay I wrote on October 24, 2008 called "Blue Chip Bargains" and the wonderful strategy that accompanied the essay reflects the essence of what VectorVest is all about. I don't know how many subscribers have used it, but we have highlighted the strategy in several VV University presentations. We also had a series of presentations under the heading of "Taming the Tiger." These presentations were designed to illustrate how to mitigate risk and make money in a highly volatile, uncertain market. Maybe they were too complex. So let's take a look at a stock picking system that's much more direct.

Let's take a look at good, old American Italian Pasta, AIPC. There it was last night, right at the top of the Stock Viewer screen. I've owned this stock for several months now and it has treated me well. AIPC first appeared among the highest ranked VST stocks on September 4, 2008 and I was shocked. What was AIPC doing up there with the big boys?

I recalled that this stock was a high flyer several years ago, but got slaughtered as its earnings turned south. As of September 4, 2008, VectorVest's Standard Graph showed that AIPC's Price had hit a recent bottom six months earlier and started to go up by leaps and bounds with repetitive high volume explosions. On June 19, 2008, its Price hit a 52-week high at $11.28 per share. And soared again after that! This is exactly what I like to see.

The reason for this performance was revealed by adding EPS, forecasted earnings per share to the graph. EPS had exploded from minus 30 cents a share to plus 54 cents per share on July 8, 2008. EPS stood at $1.61 per share on September 4, 2008, the day I first noticed the stock. AIPC has appeared regularly among the top ranked VST stocks ever since. On December 11, 2008, AIPC with a Price of $22.60 a share had the highest VST of any stock in the database. Last night it stood at $31.88 per share. So how can we find more stocks like this?

The surest way is to simply look at the graphs. I normally look at all the stocks, 32 on my computer, appearing on the opening Stock Viewer screen. It doesn't take very long if you know what to look for. Just to make sure I'm not missing some up and comers, I sort Stock Viewer by RT*CI and look at those stocks too. (AIPC also happened to have the highest RT*CI rating last night). Here's what I look for on the Standard Graph:

In addition to rising EPS, I want to see a smooth, rising price pattern. I can't handle stocks whose prices go up and down erratically. CI does a pretty good job of screening-out these stocks, but I like to look at the graphs anyway. Next, I like to see graphs of stocks with accelerating Price movements. AIPC is a good example of this. If Price momentum has slackened, RT has peaked or is moving lower, I'll skip that stock. I also like to see both the CI and the 40-day moving average steadily moving higher. Thirdly, I want to see new Price highs on high volume. This tells me there are some serious buyers out there. If a stock meets all these conditions, I think it's worth a bet.

In this market, don't have more than half of your capital invested at any time. Based on what I wrote last week, I wouldn't put more than four or five percent of your money into any single stock. And don't be in a hurry to ramp up your buying. Good stocks come along all the time. Even so, a stock that goes up when the market goes down is A Rare Bird.

Recently, I received the following email: "Would it be possible for Dr. DiLiddo to do an essay on sell stops? I have been whipsawed out of so many good stocks lately due to stocks ranging from 20 to 30 percent below the price only to see the same stocks recover quite rapidly. I end up buying the stock at a higher price if I want to continue to stay with it. I have lost more money that way than if I had just stayed with the stock with very few exceptions.
I called my broker at Schwab and he said he never uses stops as the Wall Street traders have a window to see where the stops are on all stocks and control enough of the stock to sell it down to knock out the stop positions and turn around and buy them when they go back up. I am sure this is nothing new but it is costing all of us a tremendous amount of money. He suggested that I put alerts on stocks so that I could make my own decision if I want to sell or not. I know this only works well enough if you are there to deal with the alert, but it may have some merit.
Even if I try to guess the range the stock is in, it seems to take drastic dips if only for a few minutes and I am sure that is where Wall Street is knocking out the stop prices. It is very frustrating."

Best Regards,

Norm

Ah Norman, I feel your pain. We have experienced the same frustration of having stocks go exactly to our Stop Price, knocking us out and returning to their normal trading pattern. How are we addressing this problem?

Let's see what we have done in managing the Model Portfolio. First of all we have been favoring highly liquid stocks. For example, we decided to buy only the five highest AvgVol Contra ETFs when we went into the market last Tuesday. My belief is that it would be virtually impossible for any trader to manipulate the price action of these actively traded stocks. Next, we bought only five stocks instead of the usual 10 because these particular ETFs behave pretty much the same. Consequently, we would not have received much more diversification by adding additional positions. Of course, having five positions instead of 10 makes it easier to manage the portfolio, but it also increases the percent risk of loss on any single position.

To counteract the problem of higher risk, we chose to use only 50% of our available funds. This decision also allowed us to use a 10% Stop-Loss instead of the 5% we normally use. The wider Stop-Loss Percent helps accommodate the high volatility of these stocks and also makes it harder for traders to knock us out of our positions.

Do you remember the formula that I presented in my February 6, 2009 essay on Risk Management? Well, here it is again:

S = (100 * R * N) / C

Where
S = Stop-Loss Percent.
R = Percent Risk of Loss on any single position.
N = Number of positions, and
C = Percent of Capital employed.

Basically, we like to keep R, the percent risk of loss on any single position, equal to one percent. So with five positions and 50% of our capital invested, we should be using a 10% Stop-Loss. And that's what we have been using.

Now here's how to relieve your frustration, Norman, and make money in this market: First and foremost, you must "let the trend be your friend." I know it wasn't easy to do while we were in the grip of the Wicked Wedge, but you must remain patient and be prepared to take what the market gives you. Last week, we were prepared to go either long or short in our Model Portfolio depending upon what the market gave us. The market went down, so we played the market to the downside with Contra ETFs.

The next thing to do is trade only high volume stocks---say those with an AvgVol of 250,000 shares or more. Then you should use the widest Stop-Loss percent that you can. Let's say you want to keep R to one percent and trade a 10 stock portfolio. Now, if you invest no more than four percent of your available funds into any single position, i.e., employ a total of 40% of your available funds, S = (100 * 1 * 10)/40 = 25%.

That's How to Set the Right Stop-Loss Percent.

The market has been acting crazy over the last five days. The Color Guard shows five red lights, seven yellow lights and three green lights, and the Primary Wave has gone from Up, Up, Dn, Up to Dn. How can anybody make any money with this kind of chaos?

You have to be agile and you have to be prepared. That's why we gave ourselves the options last night to go either long or short in the Model Portfolio today. So what did I do?

I decided to spend another day at the races. I checked Bloomberg last night and the Futures were up, just slightly. Therefore, I thought the rumor that caused the late rally yesterday afternoon probably was false. If it were true, the Futures would have been up, big time. Nevertheless, I was going to be prepared to "bet on the fastest horses" if the market moved sharply in either direction.

So I fired up VectorVest RealTime before the market opened this morning, created QuickFolios of the strategies suggested in last night's Views and waited for the opening bell. The Futures, as shown by Yahoo! Finance and CNBC, were signaling a flat open and that's what we got. All the major indexes opened modestly to the downside and the Price of the VectorVest Composite barely budged. However, the portfolio of five high volume Contra ETF stocks I had selected broke out of the gate and were up 1.66%.

At 10:00 AM, all the major indexes were down, but less than 1.00%. So I wasn't even thinking about going into the market. The Contra ETFs were still moving higher, however, and were up 1.99%. Mini Rockets Short was up 1.18%.

At 11:00 AM, all the major indexes were up, but less than 1.00%. The Price of the V V C was up 0.46%. Jailbreak was now in the lead with a gain of 2.28%. Silber's Singles/BMB was in second place with a gain of 1.54%. At 11:30 AM, all the major indexes were down, but less than 1.00%. The Price of the V V C was exactly at 0.00%. The Contra ETFs had retaken the lead with a gain of 2.30%. Mini Rockets Short was in second place with a gain of 1.21%.

At 12:00 PM, all the major indexes were still down, but less than 1.00%. The Price of the V V C was down 0.23%. The Contra ETFs portfolio had increased its gain to 2.97%. Mini Rockets Short was still in second place with a gain of 1.65%. At 12:30 PM, all the major indexes were still down, but less than 1.00%. The Price of the V V C was down 0.06%. The Contra ETFs were leading the pack with a gain of 2.62%. Silber's Singles/BMB was a surprise at second place with a gain of 1.35%.

At 1:00 PM, all the major indexes were still down, but the Dow and S&P 500 were down more than 1.00%. The Price of the V V C, however, was down only, 0.59%. The Contra ETFs portfolio was now up 4.30% and I was itching to go buy these stocks. But I had to wait at least until the Price of the V V C was down at least 1.00%. Worst Stocks Over $20.00 had now roared into second place with a gain of 2.45%. At 1:30 PM, all the major indexes were still down, but less than 1.00%. The Price of the V V C was down 0.18%. The Contra ETFs were still leading the pack, but its gain had slipped to 1.95%. Worst Stocks Over $20.00 was close behind with a gain of 1.77%.

At 2:00 PM, the NASDAQ was up 0.18% and the Dow and S&P 500 were down slightly. The Price of the V V C was up 0.16%. Silber's Singles/BMB had now taken the lead with a gain of 1.52%. Jailbreak was nearby with a gain of 1.42%. At 2:30 PM, all the major indexes were down, but less than 1.00%. The Price of the V V C was down 0.13%. Silber's Singles/BMB was hanging tough with a gain of 2.32%. The Contra ETFs portfolio was threatening to retake the lead with a gain of 2.29%.

At 3:00 PM, the NASDAQ was up 0.04% and the Dow and S&P 500 were down slightly. The Price of the V V C was up 0.16%. The Contra ETFs portfolio was back in the lead with a gain of 4.30%. Worst Stocks Over $20.00 was in second place with a gain of 2.13%. At 3:30 PM, all the major indexes were down, but less than 1.00%. The Price of the V V C was down 0.14%. The Contra ETFs portfolio was up 2.68% and Worst Stocks Over $20.00 was up 1.96%.

At 4:00 PM, the market closed with the Dow down 1.04%, NASDAQ down 0.48% and the S&P 500 down 1.00%. The Price of the V V C closed down 0.49%. The Contra ETFs portfolio won the race with a gain of 4.61% and the Worst Stocks Over $20.00 came in second with a gain of 2.75%. While I would have been very happy to log either of these gains into the Model Portfolio, the market did not move sharply enough, 1.00% or more, for me to jump in. So we are still in cash and I'm looking forward to spending Another Day at the Races.

P.S. One does not have to have VectorVest RealTime to implement the process described above. You can use VectorVest U.S. to run the suggested strategies, and build WatchLists of the stocks found by each Strategy on Yahoo! or any other real-time platform. Then you can select stocks from the WatchList with the best performance when the market moves by 1% or more.

Many traders use a rule of thumb of betting no more than two percent of their capital on any single trade. The logic seems reasonable: keep your losses small and save your ammunition for big winners. Sounds good, but does it work?

The answer is yes under the right conditions. Unfortunately, the rule implies that you could afford to lose 100% of your 2% stake on every losing trade and still survive. This is not true. Let's suppose you were making trades that were successful 50% of the time. You'd have to make an average of 100% on your winning trades just to break even. That doesn't sound very easy to do. Moreover, by making small bets, you'd have to win much more than 50% of the time to make any real money. So there's got to be a better way to manage risk. That's what Stop-Prices are all about.

Stop-Prices allow you to increase you're stake in any given trade and still manage risk. But you still need to know what you're doing. For example, if you bet 100% of your capital on "a sure thing," you must use a two percent Stop-Loss to meet the trader's guideline. But even that wouldn't satisfy me. I wouldn't bet 100% of my capital on anything. Actually, you should never put more than 10% of your investment capital into a single position and use a 10% or lower Stop to go with it. This controls your risk of loss on any single position to one percent of your capital.

If you desire to use a wider Stop-Loss to improve trading performance, you must, decrease your stake in each position or decrease the percentage of capital employed. Here's how it works:

If R = Percent Risk of Loss on any single position,
C = Percent of Capital Employed,
N = Number of positions, and
S = Stop-Loss Percent, then
S = (100 * R * N) / C.

When we went long with Contra ETFs in our Model Portfolio on January 30th, we deployed 25% of our capital with five positions and a Stop-Loss of 10%. What was R, the risk of loss on any single position?

R = (C / N) * (S / 100).
R = (25 / 5) * (10 / 100)
R = 5 / 10 = 0.50%.

An examination of our Model Portfolio shows that we lost 3.04% in that campaign with two winners and three losers. Had we gone long with 100% of our capital and the traditional 10 positions and 10% Stops, the damage to the portfolio would have been much worse. Thank you, Risk Management.