August's ugly jobs report torpedoed stock futures' prices today, triggering talk of a recession and other gloomy forecasts. The market opened sharply lower, essentially sealing the fate of this week's rally. Is this the beginning of another brutal sell-off or will the rally from the August 8th low begin anew?

Nobody knows for sure, but even if the sell-off continues for a while, stock prices will consolidate at some point and it will be time to go bottom-fishing and bargain hunting once again. Fortunately, we have the tools to recognize when that time arrives. We have a large number of new subscribers here at VectorVest, so let me say just a few words about bottom-fishing.

In my book, "Stocks Strategies and Common Sense," I said, "Bottom-fishing is the art of buying low and selling high, and a great way to get rich." True enough, but I also said, "Buying low and selling high is not as easy as it sounds. No one knows which stocks are low and which stocks are high." Well, that was true in 1997 when I wrote the book, but it's not true anymore. We now have knowledge, tools and techniques to go bottom-fishing with precision and success.

So how do you know when stock prices are low?
Our Market Timing System tells us. When we see our Market Timing Indicator, MTI, go below 0.60, and the Buy to Sell Ratio, BSR, go below 0.20, we know the market is oversold, stock prices are low and they are more likely to go up than down.

How do you know when to actually start buying stocks?
The market tells us. When we see stock prices go up on bad news; then fall back at the end of the day, we know a big rally is coming soon. When we see that prices of stock futures are sharply higher and stock prices shoot higher at the open, it's time to buy. The trick is to be ready to buy as we were on the morning of March 10, 2009. See my essay of March 6, 2009.

How do you know what to buy?
I hate to admit this, but it took me a long time to figure this out. Of course, I knew I wanted to buy stocks with beaten down prices, and I knew they would have "S" ratings. That didn't bother me, but I also wanted to buy good stocks with high VST ratings when the rally began. This was an oxymoron, and the stocks I bought didn't perform. I did notice, however, that the stocks I had sold short in the downturn usually took off like birds. What the heck was going on?

As I see it, this happened because the fund managers and other heavy hitters owned high VST stocks as a defensive measure during the downturn; then sold them off and bought "high alpha stocks," i.e., low VST, low RT stocks as the rebound started. Further work on this phenomenon showed that low RT was the key to identifying which stocks were low. Now we have a whole slew of Bottom-Fishing Strategies that sort stocks by RT Asc. For more information, see my essay of April 17, 2009.

How do you know when to sell these stocks?
Well, we use Stop-Prices during the rally, but as it has happened over the last few days, we use the Color Guard and our Market Timing Graph to monitor the market. Even though the Primary Wave was Up, we decided to lighten up on long positions because our candlestick analysis said the rally was petering out. Dan Misch pointed this out in his Daily Color Guard Report on Wednesday. Besides, I said last week that I didn't think this rally would last very long, so I was ready to bail-out.

So there you have it: When to buy, what to buy and when to sell. Bottom-Fishing: A Great Way to Get Rich.

It's 10am and I've been watching market action all morning:  The futures were up this morning, and all three of the major indices opened about 050% higher.  Since then however, they've all been pulling back and are now up about .30%.  The Advance/Decline Mini Graph of our database shows 4.58% advancers at the open has fallen to 1.88%.  The Derby tool does a beautiful job of identifying these reversing or mixed market trends.  Open the Derby tool and select Entry Price: Prior Close.  Notice the Derby Summary window is showing 63% of the Bullish searches making money and only 14% of the Bearish searches making money.  This is consistent with the day-over-day analysis from the previous close as the market is still higher overall.  Now change the Entry Price: Prior Close to Entry Price: Market Open.  Notice the Derby Summary window is showing 82% of the Bearish searches making money since the open and only 22% of the Bullish searches making money.  While the market is still higher than its previous close, this intra-day information tells me there is a counter trend developing.  Bottom line:  I only want to enter positions if the intra-day trend is consistent with my outlook.  I've acquired the habit of checking the Derby Summary just before I place orders to confirm today's market direction. 

I thought it might be helpful to review some of the foundational concepts that drove the development of the VectorVest Derby tool. 

Prior to the release of our RealTime service and the Derby tool, VectorVest had established a methodology of identifying the best performing strategies for any market period.  The method included running a series of quick tests on as many strategies as you had the energy to run.  We would identify the best performers day-over-day or over several days and use that search going forward.  Of course, there are over 250 searches in the Unisearch tool, unless you own Simulator, who has the time to test them all?  So, typically, we would compromise and run a small group of searches: a list of our favorites, recent SOTW samples, Model Portfolio candidates.  

I invite you to go "old school" with me and review our Strategy of the Week presentation RealTime Derby - How We Pick a Winner.

http://www.vectorvest.com/vvuniversity/auth/recordedsessions/3269/3269.html 

Learn these fundamental concepts that still drive success today.

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.