I got an email from a relatively new subscriber this week who says he's disappointed in VectorVest. He loses money when he follows our C/Up, C/Dn signals and makes money when he bets against them. This is not the first time I've received emails like this, so let me explain what's going on.

Our market timing system tracks the price movement of the market via the VectorVest Composite day-over-day and week-over-week. When the Price of the VVC closes higher, week-over-week, we say the Primary Wave is Up. When the Price of the VVC closes lower, week-over-week, we say the Primary Wave is Dn. This signal is an important alert that the short-term direction of the market is up or down. It doesn't change often in strong, trending markets, but can change frequently in a flat or ranging market. For example, the Primary Wave was Up throughout the seven-week period from August 31, 2010 to October 18, 2010. And it changed 23 times in the 30 week period since December 31, 2010.

A Confirmed Up, C/Up, signal is given when the Price of the VVC goes up for two consecutive five-day trading periods, closes higher than the prior day's close, and the Buy/Sell Ratio, BSR, is above 1.00. This is a slower but more reliable signal than Primary Wave. It generally indicates that a sustainable up trend is underway. The same rules apply to issuing a Confirmed Dn, C/Dn, signal except the Price of the VVC is moving lower and the BSR must be below 1.00. The fact that we got a C/Up signal on July 7th and the market went down instead of up and we got a C/Dn signal on July 18th and the market went higher for a few days instead of lower dissatisfied the customer. But his pain was avoidable.

We learned a long time ago that you can't fight the market. Although VectorVest gave a C/Up signal on Thursday, July 7th, the market opened lower on Friday so all bullish trades should have been postponed. The market opened lower again on the following Monday, the Primary Wave turned to Dn and stayed Dn for the rest of the week. So the bullish trend was reversed. VectorVest issued a C/Dn signal on Monday, July 18th. Sure enough, the market soared the next day and the Primary Wave turned from Dn to Up. Once again, stock futures clearly indicated a strong open on Tuesday and any thought of placing bearish trades should been abandoned.

A fundamental tenet of the VectorVest system is to buy rising stocks in rising markets. We teach our customers to check the stock futures before the market opens. Check the Color Guard during the day. The market must be moving up at the very moment you place a bullish trade and it must be moving down at the very moment you place a bearish trade. Moreover, the security itself must be moving in sync with your trade.

There is no good reason why this customer should not have used this "follow through" technique. We have taught it and used it for years. Even with one green light and an UpUp situation last Friday, I said this market needs to convince me that we aren't caught in a sucker's rally. I also said that long-term subscribers know that I am leery of July highs. Moreover, we advised Prudent Investors to buy stocks only when the market is rising. Well, the market opened lower on Monday so it wasn't a good time to buy long. Once again, a bad trade was avoided because there was no Follow Through.

TRIATHLON CHALLENGE UPDATE.
The second leg of the VectorVest Triathlon Challenge, the RealTime Derby leg, was completed today. This competition was started on June 1st and proved to be a difficult course for most competitors. Only 24 of the 50 competitors made money. The three top winners performed quite well, however.

It is also interesting to note that 10 of the top 14 performers used a market timing system. The most effective and frequently used system (5 times) was the DEW. The Primary Wave was used twice as was the Confirmed Calls. Four entrants were long only. As usual, a link to showing the overall performance of all the contestants is available in the "Strategy" Section of these Views.

The First Place Winner, identified as T-38-RW, gained a very acceptable 11.77% and will receive a check for $750.00. His long search was based on "Teeny Boppers Oil and Gold," and his shorting search was simply a 5 & 10 Day MA Crossover. He used a 20% Gain, 10% Loss to exit from his long positions and a 30% Gain, 5% Loss to exit his short positions with no replacements. He used the DEW to signal market direction.

The Second Place Winner was also the same person. This entry was identified as T-17-RW. It gained 10.92% and is good for a check of $500.00. He used "Marathon" to buy long in Up markets and the 5 & 10-Day MA Crossovers to sell-short in Dn markets. He used the DEW to signal market direction. A 20% Gain, 10% Loss was used to exit his long positions and a 20% Gain, 10% Loss to exit his short positions.

The Third Place Winner, identified as T-01-DS, gained 5.17% and he will receive a check for $250.00. He used "El Cheapo Cheapos" to buy long in Up markets and "Sinking Sectors II" to sell-short in Dn markets. He used the Primary Wave to signal market direction. A 10% Gain, 20% Loss was used to exit his long positions and a 15% Gain, 10% Loss to exit his short positions.

The third and final leg of the competition will begin on Monday, August 1st and will end on October 31, 2011. The competition will be conducted using the VectorVest 7 Automated Portfolio Manager. This tool is designed to simulate real world, real time trading as closely as possible without risking any of your hard-earned money.

The results and standings of the day-to-day competition will be presented in a brand new summary report. An explanation of this report will be given in tonight's SOTW and a link to the report will be available next Monday in the "Strategy" Section of the Views.

One of the key features of the Yellow Brick Road (YBR) strategy, described in my essay of 10/03/08, is that the portfolio is allowed to extinguish itself, i.e., not replace stocks as they are stopped-out of the portfolio. The purpose of this technique was to lock in profits and mitigate the draw-downs which occur at the end of each campaign. Unfortunately, this neat trick may take you out of the game too soon.

For example, the most recent YBR campaign, discussed in my essay dated 07/31/09, lasted only five days. Although it produced a net gain of 19.8%, I didn't like it. I would have very much preferred to have stayed fully invested, but I followed the guidelines we had set forth. Since then, I have been thinking of ways to solve this and other problems mentioned in my essay of 07/31/09. I believe I have found the answer by becoming a Green Light Buyer.

You may recall from last week's essay, I said that a Green Light Buyer is someone who buys a top VST-Vector stock every time they see a green light in the Price column of the Color Guard. This definition explains the idea of the technique, but is too restrictive. Why not define a Green Light Buyer as someone who plans to buy stocks, any stocks, whenever they see a green light in the Price column of the Color Guard? In this way, they would be buying stocks as the market goes up and they could still enjoy the full power of VectorVest. For example, I ran a back-test in which I bought 10 stocks from the Jail Break Strategy on March 17th and used a 100% Gain and 20% Loss to exit positions. As of yesterday, the portfolio was up 308.74%.

Had I utilized the Green Light Buyer technique from the time I went into cash on July 29th in the YBR portfolio, the gain could now be 69% instead of 45%. OK, so I like being in the game, but not sitting around waiting for the next C/Dn signal. So I'm going to go long again in the YBR portfolio the next time I see a green light in the Price column. I'm not necessarily going to buy top VST-Vector stocks, nor will I feel obligated to buy 10 stocks at a time. I need a little more freedom to do what I want to do when I want to do it. If I'm ever going to get to Emerald City, I've got to be On the Road Again.

Like a train pulling into a station, the C/Dn signal arrived this morning, just as we expected. Of course, it won't be official unless the Price of the VectorVest Composite closes below yesterday's close, but it looks like a reasonably good bet that it will. Even if it doesn't, this is a good time to refresh our memories as to what "The Yellow Brick Road" is all about.
The Yellow Brick Road was introduced to our users in my essay of October 3, 2008. It was defined as a trading system which allows investors to make money in both up and down markets. I said it was easy to use, does not demand a lot of time and can be done at night when the market is closed.

The whole idea with the Yellow Brick Road is to buy high VST, "B" rated stocks on a C/Up signal, manage them according to a precise set of rules, go into cash; then sell-short low VST, "S" rated stocks on a C/Dn signal. The buy to go long Strategy was named "Easy Does It - C/Up" and the sell to go short Strategy was named "Easy Does It - C/Dn." Both are located in a UniSearch Group called, "Yellow Brick Road."

The rules for managing the long strategy were documented in VectorVest Views on September 26, 2008 and demonstrated at the VectorVest University on the same date. The short strategy was documented in the VectorVest Views on October 3, 2008 and demonstrated at the VectorVest University on the same date.

Three campaigns, two C/Up and one C/Dn, have been conducted since last October. These campaigns are documented in the VSA Model Portfolio Group of the Portfolio Manager Tool. The equity graph of the Yellow Brick Road - 2009 Portfolio shows that the first campaign, a C/Up, lost money while the latter two have produced substantial profits. A net gain of 26.13% is currently being shown for the portfolio.

Valuable experience was gained from these campaigns, so there are some things we will be doing that are different from those described last year. For example, we will not necessarily go short with the "Easy Does It -C/Dn" strategy, if and when we do go short. Five different strategies that could be used to go short with will be cited in the Strategy Section of today's Views so that our subscribers do not "move-the-market."

We will not go short on Monday, "come-hell-or-high-water." We will go short only if the market is going sharply lower as indicated by the major averages being down more than 1% each. The exit criteria we use to manage the portfolio will depend upon the strategy we go short with. If we go short with "Worst Performing Contra ETFs - C/Dn," for example, we will use the technique being employed in the "Riding-the-Wave" portfolio. In any case, we will describe whatever exit criteria we use.

Well, it looks like the bulls gave it a pretty good try to get into the green today, but they came up four cents short. So we now have a C/Dn signal and we'll be getting ready for the upcoming Yellow Brick Road - C/Dn Campaign.

WORST PERFORMING CONTRA ETFs - C/Dn.
Q. Why would anyone want to buy the ETFs found by the "Worst Performing Contra ETFs - C/Dn" Strategy when the market goes down?
A. Because these ETFs are the ones that are most likely to go up the most as stock prices fall.

Q. Why is that?
A. First of all, they are virtually certain to go up in price as stock prices go down because of the use of Put Options, Short positions and other contra mechanisms. Secondly, they are the ones to most likely go up the most because they have been beaten down in price the most.

Q. How do you know that?
A. Because they are sorted by RT*CI Asc. Low RT means that their prices have been clobbered. Low CI means that they have been getting clobbered for a long time.

Q. Yeah, but why would you want to buy these guys?
A. Well, it's really the same as Bottom-Fishing except it's the opposite because we're buying Contra ETFs when the market has peaked. If we want to "Buy Low and Sell High," we want to buy the Contra ETFs that have experienced the worst price performance. They will soar as the market goes down.

Q. Can you prove it to me?
A. Yes we can. Mr. Gordon White will do exactly that in this week's Strategy of the Week presentation. He will also reveal some amazing secrets on using Worst Performing Contra ETFs - C/Dn.

Our experience with the current C/Up Yellow Brick Road campaign is much better than the one we had starting on January 9, 2009. What was done differently?

First of all, we took steps to prepare you better for your entry into the market when we got the C/Up signal. For example, I wrote an essay on "Avoiding the Stampede" on March 13th, well before we actually got the C/Up signal on March 26th. Then I wrote another essay on March 20th, called "Off to See the Wizard." This essay explained that we would be suggesting several strategies for you to consider when going long on the C/Up signal because we knew that our subscribers would move-the-market if too many tried to pile into the same stocks at the same time. So we reiterated our guidance on avoiding the stampede and suggested five additional Strategies that were described in our "Strategy of the Week" presentation called, "The YBR Express Lane." Therefore, we suggested six Strategies on March 26th, when the C/Up signal arrived.

We also said, "Please do not buy any stocks tomorrow unless the market is moving higher and please use limit orders." I can't emphasize enough how important it is to buy rising stocks only when the market is rising. Well, the market did not rise the next day. In fact, it got hammered for the next two trading days and the Primary Wave went from Up to Dn. So we sat tight. Finally, on April 1st, the Primary Wave turned to Up again, and we alerted the "Yellow Brick Roaders" to prepare for entry. We went long with "Explosive GRT & EPS Stocks" on April 2nd.

Now, the fun began. It turns out that the suggested Exit criteria for the Yellow Brick Road Strategy was a 50% Gain or 30% Loss. I found that I liked the 50% Gain, but I became increasingly uncomfortable with the 30% Loss. Some of these stocks, such as ALTI, soared early on but came down sharply shortly thereafter. I didn't like that. Why should I be using a 30% Stop-Loss when the stock had soared nearly 36%? Normally, I would raise my Stop so that I could capture most of the gain. Moreover, I'd be a damn fool if I ended up losing 30% on the stock. So I tightened my exit criteria and I began using a Ratchet Stop when I thought the market was getting toppy.

The VectorVest Ratchet Stop is defined as, "the highest Stop-Price reached while the stock was in your portfolio." In the case of ALTI, this would have been $1.09, one cent below our purchase Price of $1.10 per share. The Model Portfolio shows that ALTI was sold at $1.10 per share on April 28th. Subsequently, I began using a 20% Ratchet Stop to exit positions. These Stops are usually higher than the VectorVest Ratchet Stops.

Nevertheless, I ran a back-test this morning just to see what the affect of using a Ratchet Stop instead of the 30% Stop-Loss would have been on this portfolio's performance. As of yesterday's close, the Ratchet Stop portfolio was up 35.71% and the 30% Stop-Loss portfolio was up 40.01%. Our actual gain since April 1st is 36.94%. Not bad in any case. Even though the 50/30 G/L portfolio had the best performance, I still prefer using a combination of 50% Gain and the VectorVest Ratchet Stop.