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."

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."

Two weeks ago I wrote an essay called, "One Day at a Time." The point was that you don't have to predict the stock market to make good money in it. In fact, having a preconceived notion of what stock prices are going to do could be very harmful to your wealth.

Then I began to wonder what would happen if I bought the top stock, ranked by VST, every time a Green light appeared in the Price column of the Color Guard. VectorVest preaches that we should buy rising stocks in rising markets. So I should make money. I ran some tests.

The first test I ran started on March 17, 2009, when a Green light first appeared in the Price column of the Color Guard from the March 9th bottom. I bought $1,000 worth of Buckle Inc., BKE, the top VST stock as shown in Stock Viewer, at the Open on the 18th. I decided that I would sell it on an 'S' Rec or if it went up 100%. Another Green light appeared in the Price column of the Color Guard on the 18th, so I bought $1,000 worth of Aeropostale, ARO, at the Open, on the 19th. I repeated this process of looking for a Green light in the Price column of the Color Guard and buying the top VST stock, until yesterday.

During this time, I made 44 purchases of $1,000 each and closed 19 positions with four winners and 15 losers. The average winning trade made $706 and the average losing trade lost $195. The current portfolio holds 25 positions with 17 winners and 8 losers. The portfolio is worth $31,165 from an investment of $28,013, for a net gain of $3,071, or 11.25%.

While this performance is not overwhelming, one must remember that the money was invested over a period of time, not all at once. This means that there was far less risk during the early stages of building the portfolio. In another test in which I bought 10 stocks on the March 17, 2009 Green light, I used a 50% gain or 20% loss to exit positions and replenished positions only upon receiving a Green light produced a gain of 49.74%. Other tests going back to March 21, 2003 also showed that buying top VST stocks when a Green light appears in the Price column of the Color Guard is a viable strategy.

The thing I like the most about this technique is that it's so easy to do. Simply look at the Color Guard. See a Green light in the Price column and buy a top VST stock you don't already own. Try it. You may wish to Become A Green Light Buyer.

The $64 thousand question at this week's Forex and Options Expo in Las Vegas was "What's this market going to do?" My answer was always the same, "I really don't know. That's why we're trend followers."

One of the biggest mistakes investors make is to fix a preconceived notion in their head of what the market's going to do. This notion subconsciously interferes with their trading because it causes them to see what's in their head and not what is actually going on. If the market continues to not do what they thought it would, they rationalize the market's behavior and continue to believe it eventually will do what they thought. Many a fortune has been lost in this way.

So how does VectorVest deal with the unknown? First of all, we don't try to predict the market, but we deal with what's happening right now. For example, we analyze the market's direction with our Market Timing System and we report the results of our analysis via the Color Guard. If the Color Guard was bullish and stock prices were trending higher, we would plan to buy stocks long. If the Color Guard was bearish and stock prices were trending lower, we would not plan to buy any stocks other than Contra ETFs. We might plan to sell some stocks short, however, depending upon the severity of the downtrend.

I said "We would plan to buy stocks long or we might plan to sell some stocks short," because we wouldn't actually buy or sell any stocks until we saw what the market was actually doing at the moment we intended to make the trade. In other words, we want to make certain that prices are going in the right direction when we make our trades. Moreover, I never buy a stock that is going down in price and never sell a stock that is going up. I call this "Keeping the wind at my back."

By using the Color Guard as my guide and making certain the market is going in the direction I want, I don't have to worry about what it's going to do two or three months from now...I'm prepared to accept it, as it arrives, One Day at a Time.