About 30 years ago, I was in charge of a billion dollar business that was largely involved with a commodity, plastic. We were the world's leading producer of this plastic, making over two billion pounds a year. In order to cut costs, the business was integrated back to its basic raw materials that came right out of the ground. In fact, the plastic was called Geon, which was derived from the word Geo, of the earth.

In running this business, the name of the game was to produce a quality product at the lowest possible cost. Just do the math. One cent taken two billion times is $20,000,000. Our goal was to continue to be the world's low-cost producer and we worked very hard at it. But cost reduction alone wasn't enough to make a good profit. You also needed pricing power, which was impossible to get during a recession like we had in the early 80's.

Yes, I remember the early eighties very well...they were so reminiscent of what we have today. Cost cutting is king and pricing power is nowhere in sight. Last quarter's profits are deemed to be good, but investor's want to see sales growth because you can't cut costs forever. But, hey, all businesses aren't commodity businesses. There are companies out there that make specialty products, have pricing power and good profit margins. Who are they and how do you find them?

You use VectorVest, of course. All you have to do is create the following parameter: 100*(EPS/SPS), by using the Custom Field Builder. The 100 converts the ratio EPS/SPS from a fraction to a percentage. Since EPS is the forecasted Earnings Per Share and SPS is Sales Per Share, the new parameter gives you the Net Profit Margin, NPM, in percent. Let's see how well it works. (Dan Misch will show you how to create this parameter as an addendum to tonight's "Strategy of the Week" presentation).

You may recall from my November 10, 2006 essay, "How I Use Stock Viewer," that I like to use Stock Viewer to explore the extremes of all the various indicators and parameters in our database, so I put our new parameter into Stock Viewer and sorted by 100*(EPS/SPS) Desc. A stock called Targa Resources, NGLS, popped to the top of the list as of March 4, 2010. I took a look at its graph and it's beautiful. Wow, it has an NPM of 2,400%. Are you kidding me? VectorVest showed an EPS of $1.20 per share and SPS of $0.05 per share. So the math is OK. What about the data?

I clicked on News at the top of the Stock Viewer screen and a page from Yahoo!Finance popped up. I immediately saw that NGLS was a Limited Partnership, LP, so I was prepared to see some bizarre stuff...but nothing like I actually saw. I clicked on Key Statistics; then scrolled down to Income Statement. It showed that NGLS had Revenue of minus $1.52 billion and EPS of $0.66 per share over the last 12 months. VectorVest shows Sales of $3,180,000 and forecasted earnings of $1.20 per share. So who's right? I think VectorVest is, but if Yahoo!Finance is right, they ought to send whoever is running Targa to Congress.

Next I set the date in Stock Viewer to March 10, 2009, i.e., the day we saw the market explode from the Bear market bottom. I sorted by 100*(EPS/SPS) Desc., and ran a Quick Test from 03/10/09 to yesterday's close. It was up 118.42% with eight winners and two losers. Not bad, but the big winner was a $0.30 stock, which I didn't like. So I created a Derby Ready Strategy that I called NPM Analyzer and I put it into a new Group called Net Profit Margin. I ran the search as of 03/10/09; then ran a Quick Test through yesterday's close. It was up 65.07% with 100% winners. The big winner was Baidu.com, up 214.41%. Hmm, maybe, I have something here. I set the search date to 03/17/09, the first day we got a Green light after the March bottom and ran the test. Uh-oh. It was up only 29.93%. So I tried it on 03/26/09, when we got a C/Up signal. The result was better, up only 38.16%, but still somewhat disappointing.

I figured I had to adjust the search to return better stocks. So I set VST > 1.25 as one of the criteria and tried that. This search returned a better quality of stocks, but its overall performance was substantially worse than before. Out of curiosity, I decided to sort by 100*(EPS/SPS) Asc., instead of Desc. Remarkably, I got much better results with gains of 57.38%, 123.36% and 107.18%. Unbelievable! I then began to pick dates at random. In every test I ran, the Asc., sort beat the Desc., sort. What was going on?

I thought of Mr. Carlton Lutts, former editor of The Cabot Market Letter. He loved to pick stocks that were unknown, not yet making any money but were expected to. Many of his picks would sky rocket; then crash. When that happened he would say the love affair was over. He said that stocks were romanced before they started making money; then the accountants took over when they finally started to make money and they plunged. In honor of good, old Carlton, I called the revised Strategy, Romancing the NPM.

WINNING BIG, THE EASY WAY: FOLLOW UP.
We got so many questions regarding last week's "Strategy of the Week" that we decided to clarify exactly how those phenomenal results were obtained. We want you to know exactly how to use the 5-Day Derby Winners because it could be very big if it fulfills its promise. So join Mr. Dan Misch at the VectorVest University to see this week's very important "Strategy of the Week" presentation: "Winning Big, The Easy Way: Follow Up."

With triple digit up and down days becoming par for the course, the market has been herky-jerky lately, to say the least. So how can one survive these wild swings and still make some money? The best way I can think of, is to learn how to see through the market's daily gyrations and stay with its prevalent trend, the way to do this is to use the Enhanced ProTrader Market Timing Graph, EPMTG. I wrote about this graph on November 30, 2007 and an excellent "Strategy of the Week" presentation was given which showed what it is and how to use it.

Nowadays, we use the EPMTG regularly in our Daily Color Guard Report, but before I go too far, let me tell you more about the original ProTrader Market Timing Graph. It used three key indicators: A Detrended Price Oscillator, Envelopes and a 30-Day Weighted Moving Average. Many of our subscribers refer to it as the "DEW" system of Timing the Market. But make no mistake, the DEW system does not conflict with or replace our Standard Market Timing System. It serves as a compliment. All I did to create the EPMTG was to add the MACD to the DEW graph. The key to using it properly is to use the MACD crossovers to pinpoint meaningful changes in market direction.

To see the EPMTG, simply access the Standard Market Timing Graph; then click on ProTrader Graph in the box labeled Graph Type. (If you do not have ProTrader on your computer, you may visit our website, or click here, to sign up for a Free 2-week Trial). I usually set the graph up with a 3-month Period in order to clearly see the MACD crossovers. If you do this, you can easily see that the DEW indicators signaled the start of a rally on 12/11/09. The Color Guard flashed a green light on 12/14/09 and the day's "Five Best Performing Strategies," all Bullish, were listed. Which one would you have chosen to use?

According to the EPMTG, the rally lasted until 01/20/10, and the Color Guard coincidentally flashed a red light. The day's "Five Best Performing Strategies," all Bearish, were listed. Which one would you have chosen to use?

I observed an interesting phenomenon while preparing for this essay. The Total Gain column of the Totalizer, in the VectorVest RealTime Derby, showed a steady series of top performing Bullish Strategies, day after day, throughout the rally from 12/14/09 through 01/20/10. It did not flip-flop from Bullish to Bearish and back again according to the daily whims of the market. It also showed a steady series of top performing Bearish Strategies, day after day, throughout the downturn from 01/20/10 through to today. It did not flip-flop from Bearish to Bullish and back again even when the market rallied sharply.

What this tells me is that we should be able to use the EPMTG, the Color Guard and the Totalizer to see through the market's daily gyrations, stay with the prevailing trend and pick sure-fire, money making Strategies. What A Magnificent Combination.

P. S. From this time forward, we will report to you the Strategies with the best Total Gain as shown in the Totalizer from the onset of a new trend. We will call them Derby Leaders.

GOING TO THE BANK WITH DERBY LEADERS.
How well could you have done if you went long with one of the Derby Winners listed in the 12/14/09 Color Guard Report, and went short with one of the Derby Winners listed in the Color Guard Report of 01/20/10? Mr. Glenn Tompkins, Manager of Internal Training, has the answer. So visit the VectorVest University to see this week's very important "Strategy of the Week" presentation: "Going to the Bank with Derby Leaders."

Last week I said that my goal for 2010 was to help you learn an end-of-day stock selection and portfolio management system that was consistently profitable and easy to do. The "Green Light Buyer" technique, introduced in my August 21, 2009 essay, was a major step in this direction. It is based upon the idea of buying rising stocks in a rising market, and our tests have shown that it consistently produced profits and was very easy to do.

However, it still left the end-of-day trader, a.k.a., The Midnight Cowboy, in the position of assuming that the market would go up the next day. While the odds of having an up day the day after receiving a green light in the Price column of the Color Guard would be in your favor, there are no guarantees that an up day would actually occur. Therefore, we have urged you to check the stock futures before the market opens to get a better idea of the market's likely direction.

In addition to checking the Color Guard and the stock futures, we also suggested using the technique of buying stocks only when they have gone above their previous day's high. The benefit of this technique, i.e., ensuring that you are buying rising stocks, was illustrated in the "Strategy of the Week" presentations of 11/27/09 and 12/18/09. We explained how an end-of-day trader might execute these trades by placing Buy Stop Limit orders on 12/24/2009.

Last week, I introduced a new Strategy, "Higher Ups," that finds top VST stocks that have gone above their previous day's high. "Higher Ups" is an intriguing little Strategy but I found it to be too restrictive in that it looked at only five stocks and required a stock's price go more than 1% above the previous day's high. So I created a new, but similar, search which looks at the top 10 VST stocks and removes the 1% requirement. I called it "Higher Highs" and we put it into the Strategies - Price Volume Group of the UniSearch tool.

Although these Strategies were created with the thought of helping end-of-day traders, I have found the "Higher Highs" strategy to be extremely useful in working with VectorVest RealTime. To be clear, end-of-day traders must select their stocks and place their orders before the market opens, but users of VectorVest RealTime can run their Strategies, modified to find higher highs, any time they wish and immediately see which stocks are hitting Higher Highs.

USING HIGHER HIGHS IN VECTORVEST REALTIME.
To see exactly how the "Higher Highs" strategy works, what it does and what you can do with it, please join Mr. Dan Misch, Instructor and Product Support Representative, at the VectorVest University to see this week's terrific "Strategy of the Week" presentation: "Using Higher Highs in VectorVest RealTime."

I've been getting a lot of email lately, complaining that our Market Timing System needs to be fixed. I can understand why someone would say that because the market's behavior this year has been, "a riddle wrapped in a mystery inside an enigma." (Apologies to Prime Minister Churchill.)

Yes, we've had three Confirmed signal reversals so far this year, the most ever, and we are still in the midst of an incredible string of seven two-week trend reversals. We have never seen anything like this before. Moreover, the Color Guard has produced a virtual kaleidoscope of red, yellow and green lights and the Primary Wave has been Up and Dn like a yo-yo. What's going on?

We track the market on a day-to-day and week-to-week basis using the Price of the VectorVest Composite as our primary indicator. It is an arithmetic index of all of the stocks in our database, which I believe is better than anything else out there. For example, the Price of the V V C increased by only $0.047 per share yesterday, a change of 0.2%. Yet the headlines, based upon the DJI and SPX, reported that the market was strong...the DJI went up 0.67% and the SPX was up 0.58%. They also misrepresented the overall market's performance by reporting that the number of advancing stocks on the NYSE far exceeded the number of declining stocks.

In last night's Daily Color Guard Report, Mr. Shaffer showed that the number of advancing stocks, 3,456, in our database was only slightly higher than the number of declining stocks, 3,417. Mr. Shaffer also illustrated the sensitivity of the Price of the V V C by noting that the Primary Wave changed yesterday from Dn to Up on the strength of a $0.005 per share week-over-week change in the Price of the V V C. If you listen to the talking heads on TV, you'd think the market is soaring higher and higher, but the Price of the V V C closed yesterday only $0.04 per share higher than it did on 11/09/09. The high since 11/09/09 was $23.45 and the low was $22.83 for a range of $0.62, or about 3%. Now that's a flat market if I ever saw one.

When the market is as flat as it has been recently, small but erratic changes in the Price of the V V C can cause numerous and seemingly inconsistent color changes in the Color Guard, which cause confusion if one does not look at the Market Timing Graph. Even better, it pays to watch the video of the Daily Color Guard Report for a complete analysis of the market's action.

Last night, Mr. Shaffer also pointed out that the percentages of both the Buys and Sells had gone up for the last three days. He then explained that this type of rotation is what we call "Focusing." I've seen this happen before and wrote about it in my essay of 12/10/99. In observing that incredible rally, I said "money is focusing on high-fliers when the percentage of Buys and Sells are both going up. The BSR is telling us that we have a highly selective, momentum driven market...a dangerous market. This may not be what you want to hear, but it's an important part of Understanding the BSR."

If you understand our Market Timing System, you'll see that it accurately reflects what the market is doing. It doesn't predict the market, but it provides timely analysis and Valuable Insight.

PROFITING IN A FLAT MARKET.
Yes, you can make money in a flat market. No, it doesn't require sleight of hand and it's not all that hard to do. Mr. Todd Shaffer, Product Consultant and Instructor, will show us several ways of achieving this nearly magical feat. So visit the VectorVest University to see this week's nifty "Strategy of the Week" presentation: "Profiting in a Flat Market."

PREMIER GROWTH STOCKS.
Last week I said I was going to start a Premier Growth Stock Portfolio, but didn't say when. Well, I plan to do it around the beginning of next year. I've been working on ways of coping with extended, severe downturns and still have some work to do. I have several options in mind, but I'm hoping that Santa will put the answer in my Christmas stocking.