A thread from the Yahoo! User Group came to my attention recently in which the writer questions the value of back-testing. Here's what it said, "VV has many great features that I find useful but I think too much emphasis is placed on back testing (i.e., STOW & Derby Winners). BT is great for "predicting" the past, sort of like driving down the interstate using only the rear view mirror in hopes you'll get to your destination that's in the other direction...we can't see where the market will go but using where it's been to predict seems foolish to me."

This sarcastic statement sums up just about every misconception about back-testing one could imagine, the most egregious being that back-testing is used to predict the future. We use back-testing to systematically accumulate the knowledge we must have to know When to Buy, What to Buy and When to Sell. Knowing When to Buy is all about market timing and anybody who knows anything about VectorVest knows we don't predict what the market will do. We track the market and do what it's telling us to do. We advocate buying rising stocks in rising markets and selling falling stocks in falling markets.

If, for example, the Color Guard is bullish at the end of the day, it means that the market has been rising and we expect it to rise the next day. We don't know what it will actually do, so we advise you to check to see what it is actually doing when you place your trade, be it the next day or whenever. In my 07/29/11 essay on "Follow Through," I said, "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." If you abide by this simple rule, you will be a much more successful investor.

An important point that many subscribers miss is that every "Strategy of the Week" presentation, SOTW, begins with an explanation of how and why the starting and ending dates of the test periods were determined. We do this over and over again to show you how to buy low in up markets or sell high in down markets. Hopefully, you will learn to do this with real money.

Unfortunately, some subscribers think a SOTW presentation means that it is the strategy to use at the very time it is given. THIS MAY OR IT MAY NOT BE THE CASE. The SOTW's are given for educational purposes. They usually are timely, but educational value on a new search or technique trumps timeliness.

I received an angry email from a subscriber who said he bought stocks on the basis of my 10/28/11 essay, "Become a Believer," and the associated SOTW, "Seeing is Believing," and he lost a lot of money. Now here's a guy who bought his stocks three weeks after he should have and did it on days the market was getting hammered. Where has he been? He violated what we try to teach in our SOTW presentations and he blames me for his bad experience.

We can't force our subscribers to watch the SOTW presentations, but if there is a better way to show you what has worked in the past and what is more likely to work in the future, please step forward. I'm all in favor of increasing The Value of Back-Testing.

Are you a believer? If you are, you made a lot of money yesterday. And you made a lot of money this week...and last week...and the week before...and, by golly, the week before that!

Yes, we nailed the bottom of the market four weeks ago, October 4th to be exact, and began buying stocks on the morning of October 5th. The 50 stocks found by the five one-day Derby Winners shown in the October 4th Views have gained an average of 33.1%. Was this just dumb luck? Not at all, we've done it before.

Read the VectorVest Views of March 6, 2009 entitled, "Itching to Rally." In this essay, we prepared our readers to buy stocks in the event of an imminent, explosive rally. We repeated our guidance on Monday, March 9th, the day the market hit bottom. Stock prices exploded the next day for the buying opportunity of a lifetime. That wasn't dumb luck either. So how do we do it?

Take a look at an End-of-Week, All Data view of our Market Timing Graph. Show the Buy to Sell Ratio, BSR, at the bottom of the graph and change the color of the BSR to yellow, so you can see it clearly. Note that the BSR cycles up and down over and over again. Imagine how much money you could have made if you had bought stocks every time the BSR rose from a bottom. You'd be so rich you wouldn't have to buy lottery tickets any more. But it doesn't start there.

It starts by recognizing that you haven't made any money until you sell your stocks at a profit. So you want to sell stocks when prices are high, and we are just as proud of our ability to get you out at tops as we are of getting you in at bottoms. But that's not the point. The point is that when you sell stocks at high prices, you will learn to stop worrying and love bear markets. Yes, you read that right. You will learn to love bear markets because bear markets create great buying opportunities!

I do become concerned, however, when prices get too high. The period starting on July 1st presents a classic example of such a time. On the Friday, July 1st, I vented my concerns about "A Fearless Market" that was ignoring a variety of serious problems. The following week, I questioned whether a poor jobs report would become a "Game Changer." On July 15th, the "Strategy of the Week" was entitled, "The Armageddon Collar," and our Market Timing System issued a Confirmed Down signal on July 18th.

Although the market rallied into July 22nd, I advised readers that it could be a "sucker's rally." Indeed, stock prices fell for the next seven days, rallied one day; then plunged to a low point on August 8th.

By that time, the market was tremendously oversold and the BSR was at an extremely low level of 0.04. It was time to start preparing for a rebound. On August 12th, I wrote an essay called "Secret Weapon," in which I railed against the faulty practices Wall Street preaches to suffering investors. Most importantly, I shared how my sad experience of selling my stocks at a market bottom led to the creation of VectorVest.

The following week, August 19th, I wrote an essay explaining that stock values go up when prices go down. I advised my readers to not be afraid, and quoted Mr. Warren Buffet who said, "Be fearful when others are greedy, and be greedy when others are fearful." I also asked them to be patient because the market was "Giving Birth to Bargains."

The downturn continued, however, and investors became even more fearful. Many of them were becoming discouraged, so they needed encouragement. On September 2nd, I wrote an essay called "Bottom-Fishing: A Great Way to Get Rich." In this essay I described exactly how we do what we do. It's all there: When to Buy, What to Buy, and When to Sell. There are no secrets.

Finally, on September 30th, I wrote my now famous "Hang-on Sloopy, Hang-on." In this essay, I said, "the way to get rich is to have the patience and fortitude to buy stocks when everyone else is scared as hell." I also said we would use all the skill, knowledge and experience we have to signal the right time to start buying stocks. As noted above, that time came on the evening of October 4th.

If you want to become an expert bottom-fisher, you must have the sense to sell high and the courage to buy low. Most of all, you must Become a Believer.

P.S. Make sure you see this week's "Strategy of the Week" presentation, "Seeing is Believing."

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.

We were demonstrating VectorVest RealTime to some very important guests yesterday when it was noted that while the major indexes, DJI, SPX, IXIC, and VVC, had been up all morning, the Derby Summary window was showing a higher percentage of winning Bearish portfolios than Bullish portfolios. How could that be?

Clearly, the Derby Summary was showing portfolio performance from the market's Open and it meant that traders were taking profits from the modestly higher opening prices. On the other hand, the Derby Summary, when taken from the market's prior Close, was still showing a higher percentage of Bullish portfolios than Bearish portfolios. I commented that this conflict of Bullish and Bearish winning percentages was an indication of a weak rally and a price reversal was quite possible.

Indeed, the Mighty Dow went from a high of 12582 at 10:29 AM to a low of 12416 at 1:21 PM for a reversal of 166 points. It closed the day at 12437, down 54 points from its prior Close.

The same thing is happening again this morning. The market opened to the upside, all of the major indexes were up, but the percentage of winning Bearish portfolios when taken from the Open is higher than the percentage of winning Bullish portfolios. The reverse was true when taken from the prior Close. Are we going to have another intraday reversal?

I don't know for sure, but I know that this signal worked very well when I wrote about it in last Friday's essay. It has also worked well for me on many other occasions. Try it. The Derby Summaries provide a great way of Sensing Intraday Reversals.

P.S. Stock prices carved-out a "W" profile today: opening higher, falling, rising, falling again; and then closing modestly higher. So while we didn't get an honest-to-goodness reversal day today, the percentage of winning Bearish portfolios from the Open accurately reflected today's wishy-washy market remaining higher than the percentage of winning Bullish portfolios all day long.

GAME CHANGER.
Last Friday I asked if robust Q2 earnings reports will be enough to keep the rally going in the face of June's dismal jobs report. I thought they could in light of the market's recovery from Friday's intraday lows, but stock prices got crushed on Monday and went lower again yesterday. While I haven't given up on the recuperative power of strong earnings, the acrimonious negotiations over the debt limit aren't helping investor sentiment at this time. If an acceptable solution to the nasty debt ceiling problem can't be found, it may be the game changer that changes the Game Changer.

THE ARMAGEDDON COLLAR.
President Obama wants to raise the debt ceiling and he wants to pay for it through a combination of tax increases and spending cuts. The Republican leaders do not want to raise the debt ceiling and do not want to pay higher taxes. So there is a stalemate going on and the government is going to run out of money on August 2nd if a solution is not found. Nobody knows what will happen if the U.S. defaults on its debt payments. Some people say it will be no big deal. Others, including Helicopter Ben, say the consequences will be very serious...even catastrophic. So what are you going to do if worse comes to worst?

Visit the VectorVest University and join Mr. Bryan Barnes, Consultant and Senior Instructor, for the answer to this serious problem. He will illustrate how you can protect your portfolio in this week's very important "Strategy of the Week" presentation, "The Armageddon Collar."