There I was, like a big, fat cat, waiting to jump on its prey. So I waited and I waited. Upon occasion, I thought I had picked up the scent of a rally, but it never happened. The ball game had changed and I have to make adjustments. What will they be?

Let's take a look at the Market Timing Graph in the All Weekly Mode. Look at the years prior to March 2003. You can clearly see that during this time, you could have made lots of money by selling your long positions and going short when the Buy/Sell Ratio, BSR, went to 3.0 or above. Another good sign of a top was that given by our Market Timing Indicator, MTI. When it went above 1.60 and then fell below 1.60, you could bet that a downturn was in store.

Having had these signals hammered into my head for a number of years, I was dumbfounded on June 6, 2003 to see the BSR soar to the lofty level of 7.54 and the MTI hit an all-time high of 1.72. My old rules were telling me the market was way overbought. It was time to sell. Sure enough, the BSR plunged to 1.36 and the MTI fell to 1.11 by August 8, 2003. The only problem was that the Price of the VectorVest Composite, VVC, went up, not down. Obviously, this market was different.

Now let's return to the present. During the great bull market of March 2003 to July 2007, I learned that you could bet the farm on a rally when the BSR went from below 0.20 to above 0.20. So when the BSR peaked at 2.36 on 10/09/07 and fell to 0.14 on 11/26/07, I wasn't the least bit concerned. I knew that stock prices would fly higher shortly thereafter. Indeed they did, but the rally from the 11/26/07 low lasted only ten days and the BSR climbed to only 0.51 at the high point of the rally. The next rally, from 12/17/07 to 12/26/07, lasted only six days and the BSR hit a high of only 0.47. Once again, something had changed.

So there I was a couple of weeks ago, like a big, fat cat, waiting to pounce upon the next rally. I was in cash, so I could wait. But the rally never came. What I saw instead, was a series of single day up moves getting stifled time after time with many of those promising days turning into routs. Even today, a nice up move at the open has turned into a downer.

Well I didn't wait until today to figure out what was going on. I wrote about it last week. The Pros have gone from buying the dips to selling the rallies. This is what they were doing prior to the great bull rally of 2003. Then they switched to buying the dips during the summer of 2003. Now they have returned to their old modus operandi. Putting this view on the table upset some people, but I have to call it like I see it.

What I see now is that we have to go back to using the old rules. We have to be more cautious when going long, quicker to take profits at tops and more aggressive when going short. Yes, there will be rallies and some of them will be terrific. But they'll last only two to four months instead of four to eight months. Fortunately, there are lots of ways to make money in a down market and we'll be using them as we go along. The market has changed. That's The New Reality.

USING LONG STRADDLES.
Is the market going up? Down? Whatever. Straddles allow us to make money either way, just so it does one thing or the other. Mr. Glen Tompkins will show us how this works in this week's "Strategy of the Week." Visit the VectorVest University to see it all.

I received an email from a subscriber yesterday which raises some very interesting issues. In part, the email says, "You have tremendous discipline and confidence to stick with short sales in the model portfolio; everything you say is right on the money. Had your critics waited a few days they would have changed their tunes.

I noticed that the stock market seems to deflate every few days with the high flying stocks giving back much of their gains. I think this is hedge funds taking profits and maybe manipulating options.

I'm sure there was funny business on February 27. Stop loss orders placed with my broker hurt me a lot. Stocks opened below the stop, my orders executed then the price rose - all in a few minutes. This sell-off did not correspond to options expiration, but I think some hedge funds took advantage of a bad day when stocks were down. Spook the market (drive price down) then buy shares cheap from buyers who panic."

Yes, indeed! Ever since the market flattened-out in December, money has been rotating out of winners and going into laggards. High flyers have been getting pasted, but that's nothing new. Unfortunately, it's a tough market in which to make money if you're a momentum player. Our Model Portfolio went essentially nowhere in the last quarter of last year even though we ended-up with a 60% gain. It was weird.

Even weirder is the choppiness of the market. There once was a time when a down week in the Price of the VectorVest Composite was a noteworthy event. Not anymore. Just look at a four year display of the Market Timing Graph in the weekly mode. The longest string of consecutive up weeks was six, and that happened in 2005. In the 31-week rally from July 21, 2006 to February 23, 2007, there was only one five-week string of higher prices. In the first ten weeks of the rally, there was a string of four consecutive up and down weeks. So what's going on?

First of all, more and more trades are being made with sophisticated computer systems that include technical analysis models or derivations thereof. These systems take profits in short spurts and buy at support levels. I have read that these systems, including program trading, now account for more than 50% of all trading. But you can't blame only the hedge funds for what's going on. The big brokerage firms and investment banks led the way with program trading many years ago and they continue to be the major players in system trading. They make hundreds of millions of dollars a day trading stocks, so they're not going to stop.

As far as placing stops with a broker, I stopped doing that years ago. They only use the information to pick your pocket. Another problem I see is that of big price movements before the market opens. More often than not, the bulk of a day's price change occurs before the open. How can you make money under those conditions? The answer is that we have to do a better job of calling our shots. This means we need to be patient when we need to be and act quickly when we should. Right now, we're waiting for the market to come to us. We're not going to chase it up and down every few days. It's called Survival 101 in A Changing Market.

With the up and down price gyrations of the market over the last two months, it's a good time to step back and take a hard look at our Market Timing Graph. You may open this graph by clicking on Graphs in the Main Menu Bar and selecting Market Timing Graph, Standard. The closing Price of the VectorVest Composite, V V C, which is the cornerstone of our market timing system, is shown in the upper portion of the graph. Our Market Timing Indicator, MTI, which provides insight on the price behavior of the market, is shown in the lower portion of the graph.

The first thing to note is that the Price of the V V C closed at its highest point on February 1, 2006. Only three days earlier, it had closed above its March 10, 2000 all-time high of $26.46. This was a notable event because the March 10, 2000 high represented a major resistance level and closing above it could have lead to substantially higher highs. But it did not. The Price of the V V C plunged from its February 1st high of $26.64 to a low of $25.98 on February 13th. During this period, the Primary Wave, which reflects the week-to-week price movement of the V V C, went from Up to Dn and on February 10th; the Price of the V V C marked its second consecutive week-to-week down move, giving a preliminary signal of a sustainable downturn.

The two-week signal is not something that can be ignored because it works most of the time. In this case it did not work. The market began to move higher on February 14th and the Primary Wave reverted to Up. The Price of the V V C rose for the second consecutive week on February 21st, signaling a sustainable uptrend. Sure enough, the Price of the V V C went down yesterday, but closed up 9 cents today. At today's close of $26.65 per share, the Price of the V V C is 1 cent above its February 1st high of $26.64 and 16 cents above last Friday's close of $26.49. An upward price movement will extend the rally or a small down move could flip the Primary Wave back to a Dn signal. Net, net, this is a market that is trending higher but can easily start going down again.

Why did I say that? First of all, the Price of the V V C is forming a double top, which is a bearish signal. Secondly, the paths of the Price of the V V C and MTI have been diverging in a bearish fashion, i.e., the Price of the V V C has moved above to its February 1st high while the MTI has not. Thirdly, this last rally has been shorter and weaker than the previous two rallies in the upturn from 10/21/05. An important price level to watch is shown by the 40-Day Moving Average. Notice that the Price of the V V C approached it twice before, then bounced higher. Will it happen again? I don't think so, but the only way to know for sure is to keep looking at The Market Timing Graph.

THE RIMM STRADDLE/STRANGLE SWAP.
As noted two weeks ago, see my essay of 02/10/06, I sold 10 Feb 70 Calls and 10 Feb 70 Puts, the Straddle, for a credit of $3,550 and bought 10 Mar 75 Calls and 10 Mar 65 Puts, the Strangle, at a cost of $5,700. My net cost was $2,150. Last week I bought the Feb straddle back for a profit of $1,322.50. Today I sold my 10 Mar 75 Calls for a profit of $1,490.00. Right now I've booked a gain of $662.50 and still own the 10 Mar 65 Puts which are priced at a $1.00 per share.

The judge ruled today and did not shut RIMM down, but he left a lot of things yet to be done. RIMM's stock moved higher by as much as 8+ dollars/share, but didn't stay there very long. RIMM is not out of the woods yet, so I hung on to my puts.