I don't believe in buying stocks that are going down in price. A lot of people do, however, and it's a fact we have to acknowledge. It seems that more and more investors, who may have missed the rally from the March 9th bottom, have been waiting for prices to fall so they can get into the market more cheaply. I wrote about this in last Friday's "Strategy" section of the Views and it's a common practice called, "buying the dips."

It also seems there is still a lot of fear in the market, so traders have been quick to sell, nailing down small profits. The net result has been an up and down market, the likes of which we have never seen before. Specifically, the Price of the VectorVest Composite went up two weeks then down two weeks in five consecutive waves on a Friday-to-Friday basis since September 4, 2009. In the meantime, the Buy to Sell Ratio, BSR, went from above 1.00 to below 1.00, giving a C/Dn signal on Wednesday, October 28th; then, on the current up wave, the BSR went from below 1.00 to above 1.00 on Wednesday, November 11th, giving a C/Up signal. This event produced the third reversal of a confirmed signal so far this year...another first.

As you might expect, I have received numerous phone calls and emails complimenting me on this extraordinary feat and offering helpful advice. The only thing I can say is that we call it the way we see it. If the market goes up we report it, if it goes down we report it. Our Market Timing System has served us well over the years and I'm not going to ditch it now. But I am going to use it more wisely.

I've known for a long time (see my essays of 01/04/08, 01/11/08 and 01/18/08), that the Pros "sell the rallies" in a Bear market and "buy the dips" in a Bull market. Even though I think we're in a Bear market rally, most investors believe we're in a Bull market, so they're "buying the dips." This means that it won't pay to sell-short when these guys are waiting to buy stocks every time they go down in price. You can't fight market psychology. I tried it during the 2003 - 2007 Bull run and it was largely unsuccessful. OK, so if we're going to "buy the dips," when should we do it and what Strategies should we use?

In my essay, "When To Go Long," dated January 4, 2008, I said, "An Aggressive Investor would wait until the Primary Wave gives an Up signal." This guidance is just as good today as it was then. So what Strategies should we use? I covered this subject on January 11, 2008, but a lot has changed since then. We have some great new Strategies now and the VectorVest RealTime Derby keeps us abreast of the Strategies that are cooking at the moment. Even so I wanted to put myself into the place of an investor who was actually "buying the dips." What would he or she buy?

I concluded that most of these investors would be "Value Investors," looking for beaten-down bargains. So I began to play with some of our Bottom-Fishing Strategies. I got some interesting results; then I asked Dan Misch, one of our Product Support Specialists, to dig into the problem. He got some stunning results.

Visit the VectorVest University to see what Dan found in this week's "Strategy of the Week," "Buying the Dips."

There is a direct correlation between the direction of stock prices and the anticipated direction of corporate earnings. Stock prices go up when earnings are expected to go up and stock prices go down when earnings are expected to fall. This relationship was vividly shown last week when we examined the All-Weekly graph of the S&P 500 WatchList. In my essay, I said as long as the S&P 500 EPS continues to rise, I am content to believe that we are on the road to recovery. So what are the impediments to rising earnings?

Of course, a weak economy, such as we have had for the last two years, has made it very difficult for earnings to rise. Workers have lost jobs and they have less money to spend. So the demand for goods and services has decreased and employers discharged more workers, which further reduced demand and so on. In order to reverse this vicious cycle, politicians enacted a massive stimulus bill, the Treasury Department printed tons of money and the Federal Reserve lowered the Fed Funds interest rate to essentially zero percent. Therein lies a tale.

The Federal Reserve is the key player here because it has the responsibility of maintaining a stable currency and of ensuring full employment. This is an impossible task. One conflicts with the other. If The Fed wants a stable currency, it must favor high interest rates which will slow economic growth and raise the unemployment rate. If it wants to have full employment, it will favor low interest rates which will debase the currency and invite rampant inflation. Right now, The Fed is doing all it can to stimulate the economy and reduce the unemployment rate.

Earlier this week, The Fed announced that it will keep its benchmark short-term interest rate "exceptionally low" - near zero - for a long time to come. The decision not to raise rates seems prescient given today's jobs report which said that the unemployment rate hit a 26-year high of 10.2%. But it wasn't that hard to make. The Fed never raises interest rates until after the unemployment rate has peaked and begun to go down.

So the threat of high interest rates will not impede earnings growth for the foreseeable future. What about inflation? Inflation is not a problem right now. Banks are hoarding money and inflation won't start going up until they begin lending and consumers start spending big time. So inflation, in the classic sense of higher prices for goods and services, is benign and it will not hamper earnings growth for some time to come. But there is a problem.

The weak economy, excessive government spending and loose monetary policy are driving the value of the U.S. dollar down. This is driving up the price of oil and other commodities. In the long run, high oil and commodity prices will have the same damaging effect as rising inflation and interest rates, The Enemies of Earnings.

HOW TO PICK HIGH PERFORMANCE STRATEGIES.
Once again we mine information generated by the VectorVest RealTime Derby. This time Mr. Todd Shaffer will show us a simple but effective technique of finding Strategies showing the highest performance in several ways. So join Mr. Shaffer at the VectorVest University to see this week's "Strategy of the Week" presentation: "How to Pick High Performance Strategies."

The Bulls stampeded on Wall Street yesterday, driving stock prices sharply higher on news of the Commerce Department's GDP report of 3.5% annual growth. Hurray, the recession is over...or is it?

The Bulls had a right to celebrate yesterday's GDP report. An expanding economy means jobs, higher earnings, a sustainable bull market and, indeed, a return to happier days. But some analysts say the GDP report was as phony as a three dollar bill. Be that as it may. The things I watch are earnings, inflation and interest rates. If the economy is on the road to recovery, it will be reflected by these factors. The Investment Climate shown below shows that the Trend Indicators for inflation and interest rates are favorable. The problem is earnings. What is going on with earnings?

Thomson Reuters, a leading data provider, says that with half the companies having reported, an astounding 81% have exceeded expectations. So what? Any CFO can low-ball a forecast; then beat it hands down. Let's turn to our trusty VectorVest database to see what we can learn. Let's open the S&P 500 WatchList and look at the average EPS for all the stocks in the S&P 500. As of yesterday, it was $2.26 per share. When I go back exactly one year, I see that it was $3.27 per share. Two years ago, very close to the S&P 500's all-time high, it was $3.70 per share. So the current EPS is still 39% lower than it was two years ago. That's not good.

When I look at an All-Weekly, Standard Graph of the S&P 500 average data, I can see that EPS literally fell off a cliff in September 2008 and hit bottom at $1.70 per share in March 2009. But it has been climbing higher over the last few months and that's good. However, it looks like it will take years to reach its former high. Indeed it will, but that's not the issue. The issue is the trend. This information is shown each week in the Investment Climate section of these Views. It is also shown graphically in the Market Climate Graph. As long as the S&P 500 EPS continues to rise, I am content to believe that we are on The Road to Recovery.

BEST PERFORMING STRATEGIES.
If you have been reading the Daily Views or watching the Daily Color Guard Report, you may have noticed how the Best Performing Strategies have shifted from predominately Bullish in early October to a mix of Bullish and Bearish in mid-October to predominately Bearish in late October. On Wednesday, October 21st, the five Best Performing Strategies were all Bearish. Which Strategy has performed the best since then? How well could you have done had you gone short with any of those Strategies? Mr. Glenn Tompkins, Manager of Internal Training, has all the answers. So join Mr. Tompkins at the VectorVest University to see this week's "Strategy of the Week" presentation: "Best Performing Strategies."

On February 13, 2009, I wrote an essay called, "Another Day at the Races." I had developed a technique of buying or shorting fast moving stocks in fast moving strategies, so I detailed how I tracked the performance of nine strategies, five bullish and four bearish, from the market's Open at 9:30 AM to its Close at 4:00 PM. In my mind, it was like going to a racetrack and watching the horses run. It was great fun and often quite profitable, so we created the VectorVest RealTime Derby.

The VectorVest RealTime Derby tracks and displays the performance of over 175 VectorVest Strategies from the time the market opens to the time it closes. With this tool, I could easily see which strategies or stocks I wanted to trade on any given day. Not only that, but I could see internal market action like never before. Take today, for example: I could easily see that the opening rally of the major indexes wasn't going to last because the Derby showed Bearish strategies out-performing Bullish strategies. Sure enough, the major indexes turned lower shortly after 10:00 AM.

With the Derby providing a tremendous amount of valuable data each day, we now needed a way of storing and analyzing it. So our developers created the Tote Board. We are very proud to announce that the Tote Board is being released today to all VectorVest RealTime Derby Users at no extra charge.

Like the Tote Board at your favorite track, the VectorVest RealTime Tote Board stores the daily Derby results and provides useful statistical information on performance. Over a time period of your choice, it shows the total gain or loss of every strategy, the percentages of the winning days and trades, and the maximum draw down. This information makes it extremely easy, of course, to see which strategies have been the best or worst performers over the time period you selected.

As I look at the Tote Board right now, 2:32 PM, the best performing strategy over the last five days is Odd Fellows Short with a gain of 8.57%. It's made money in four of the last five days, which is tops for any strategy, and it's had 68% winning trades, which is second best. It also was listed as a Top-Five Performer in Tuesday's Color Guard, and it's already up 4.1% today. Should I go short with this strategy? I just might do that. Thanks guys for The Derby and The Tote Board.

PROTECTING PROFITS.
The Price of the VectorVest Composite has gone up 61.4% from the March 9th low to yesterday's close. If you have been fortunate enough to participate in this rally, you should realize it's not going to last forever. Even if you may not wish to sell any stocks right now, you should learn how to protect profits. Mr. Steve Chappell, our Director of Educational Services, will share his knowledge and experience in how to perform this delicate task. So join Mr. Chappell at the VectorVest University to see this week's "Strategy of the Week" presentation: "Protecting Profits."