Investors are taking money out of stocks at the fastest pace since the Lehman Brothers bankruptcy in September 2008 and they're buying bonds at high prices. This is what investors do when they are fearful.

I have discussed this phenomenon many times in my presentations on "Stock Valuation and Stock Market Cycles," and "How to Master the Market." Investors always strive to put their money where they think it will pay the highest rate of return. They believe that collecting a small but certain Interest Yield, IY, is a better bet than owning stocks with a high but risky Earnings Yield, EY.

Ideally, EY tends to equal IY, but the ratio of EY to IY goes above and below 1.00, depending upon investors' emotions. When investors get greedy, like they did in the late 1990's, they buy stocks at high prices, and EY, defined as 100/(EPS/Price), goes down, often falling to less than IY. When they become fearful, as they are now, they sell stocks at low prices and EY goes well above IY. I explained this in my essay of September 24, 2004 and called the ratio of EY/IY "The Fear Factor."

Exactly six years later, on September 24, 2010, I wrote an essay called, "Stock Valuation," and introduced the concept of Yield Premium, YP. Mathematically, YP = EY - IY. YP is actually a measure of how much investors are willing to pay for stocks in relation to bonds. Investors want more value at lower prices when they are fearful. Therefore, stock value decreases and YP increases as investors become more fearful of stock ownership.

For example, on 09/24/04 the VectorVest Industrial Average, VVIA, was 45.3% above the DJIA, the EY of the S&P 500 was 6.84% and IY of long-term AAA bonds was 5.45%. Therefore, YP = 6.84 - 5.45 = 1.39%. Currently, the VVIA is 11.6% above the DJIA, and YP = 8.03 - 3.36 = 4.67%. As you can see, the ratio of Value to Price decreased as YP increased. Why does this happen?

When investors become fearful of stocks, they really are saying that stocks are worth less. So they sell their stocks, causing prices to fall. But stocks aren't worth less unless EPS has gone down or inflation and interest rates have gone up. Actually, they are worth more because EY goes up when price goes down. Fear and YP are often the culprits which push value and prices down. Remember what Mr. Warren Buffett said, "Be fearful when others are greedy. Be greedy when others are fearful." So be not afraid. Be patient, the market is Giving Birth to Bargains.


PANNING FOR GOLD STOCKS.
You won't believe it, but some weird contra ETF called Factor Shares 2X: Gold Bull/S&P500Bear, FSG, has been going ballistic and is now the number two stock highest ranked by VST. That's crazy man, but the whole gold thing seems crazy to me. I confess, however, I own GLD, RGLD, AUY, NAK and NG. GLD and RGLD have been good, steady performers, but the other guys leave something to be desired. As a matter of fact, the Gold Bugs Index, HUI, which we use in our Midas Touch presentations and the Mining(Gold\Silver) Industry Group really haven't been so hot at all. So what gives with gold stocks?

Mr. Jerry D'Ambrosio, VectorVest Consultant and Instructor, knows what gives, and he will explain the whole thing. Not only that but he will dazzle you with a gold stock strategy that will leave you breathless. So visit the VectorVest University to see how Jerry goes "Panning for Gold Stocks."

I'll be giving an extremely important talk entitled, "Planning for a Secure Retirement" at the upcoming Money Show in San Francisco on August 20, 2010. Why do I say this is an "extremely important" talk?

On June 13th, a Financial Advisor, Mr. Adam Butler of Butler Philbrick Associates, appeared on CNBC and said that "Our models suggest there is almost a 50% chance that a couple will run out of funds before they die if they adhere to a traditional financial plan." The reasons, he said, are that traditional financial plans miss two pretty serious risks: The risk they might live too long and the risk of lower than expected market returns. Traditional financial plans generally assume a linear sequence of financial returns of say, seven percent year-in and year-out, and that is unlikely to occur. So what does one do if they dramatically underestimate what they need?

Mr. Butler said retirees should put their money in two layers. The first layer should be the "guaranteed" layer for food, shelter and so on. The second layer should include an allocation of riskier assets which provide an upside for "retirement life style needs," such as bequests, charitable giving, etc. He advocates investors broaden their asset allocations to include REITS, commodities and international stocks, in addition to traditional domestic stocks, bonds and cash.

He also believes investors should have some sort of systematic exit strategy for each asset class so that they can move to the sidelines when market risk is high and move back in when market risk is favorable.

Finally, he said investors also should consider a third layer, a "momentum" overlay, which can really increase returns with a small increase in risks. My goodness, was he talking about market timing and the use of Options to augment income?

Much of this interview came to me as a breath of fresh air because most of the retirement plans I've read fail to advise retirees of the extreme importance of being able to augment their retirement income by some independent means. You simply cannot run the risk of running out of money and the returns you will get from annuities, dividends and bonds are not going to provide the security you should have. Of course, you could always work at McDonalds or Wal-Mart, but I prefer to make my extra money by investing in the stock market. I presume that you do too. That's why we have been making presentations on retirement strategies at the Money Shows and VectorVest events.

We will be making three presentations on the subject of retirement at the Money Show in San Francisco on Friday, August 20th and we will also be giving a One-Day Options Course on Sunday, August 22nd. "The PayDay Portfolio" will be featured at the Options Course. This portfolio was started with $100,000 on January 8, 2010, and had a total value of $122,364 as of yesterday. It was down 1.69% on stock trades, but has garnered $24,470 in cash deposits so far. You may learn more about this portfolio by reading my essay of June 4, 2010.

You may also register for the Money Show by clicking on the link shown above under Coming Events. We're going to have a great series of talks in San Francisco, and it's all going to start with Planning for a Secure Retirement.

P.S. The PayDay Portfolio Report has been completed and will be shipped out this coming week. We have had many requests for this report from subscribers who have not taken our Options Course, but claim to know how to trade Options and want to buy the report. If you are among them, you may buy the report for $95.00. If you have previously attended a VectorVest Options Course or bought our Options Course CD set, you may purchase the report for only $29.00.

BUYING THE DIPS.
If you look at an 18-month Standard view of the Market Timing Graph, you will see that there have been five C/Dn signals since the great blast-off from the March 2009 bottom. Buying stocks at that time produced sensational results. You will note, however, that stocks prices did not go up in a straight line. Fear and greed are always present and once the bull market has been established, some investors begin to fear that it will end and take profits along the way. Others will stay-the-course and "climb the wall of worry." Still others, who missed the boat, will wait until the pull-backs or "dips" occur and buy stocks at slightly lower prices. Buying the dips can be very profitable if you know when and how to do it, but disastrous if you don't. Fortunately, Mr. Todd Shaffer, Manager of Research, knows when and how to do it correctly. So visit the VectorVest University to see this week's instructive "Strategy of the Week" presentation: "Buying the Dips."

I received another email recently in which the writer is concerned about the future. Specifically, he is concerned about deficit spending, the money supply going through the roof with all of its unintended consequences, stagflation and inflation. He wants to know if there's a strategy one can use to help maintain a person's current buying power.

The issue of maintaining one's buying power is not a trivial matter and is more important now than ever before. Even with the rally from the March low, many investors are still recovering from sizeable investment losses suffered in 2008 and they cannot afford to see their buying power reduced further for any reason, be it retirement, a weaker dollar or inflation. So what to do?

As indicated in Chapter I of "Stocks, Strategies & Common Sense," the answer is to "invest in stocks which have earnings growth rates greater than the sum of inflation and long-term interest rates." True, but you can't buy just any old stock. You need to buy stocks of the most successful companies, companies that crank out higher and higher earnings year-in and year-out. These are large capitalization stocks that have visibility and are favored by Pros.

OK, so how does one find these stocks? Simple, I created a strategy called Premier Growth Stocks and put it into the Strategies - Retirement Group of the UniSearch Tool. I tested it over three time periods covering a total of 126 months: (1). January 5, 1996 to March 24, 2000; (2). March 21, 2003 to November 1, 2007; and (3). March 26, 2009 to December 2, 2009. I stayed "Long" 100 percent of the time during each test period and managed the 10 stock portfolios on a weekly basis. The Average Annualized Rate of Return for the three tests was 51.65% and the Average Maximum Drawdown was 14.15%. The Premier Growth Stocks Portfolio outperformed the VectorVest Composite in each test.

I tested the Premier Growth Strategy during the two Bear markets between the periods cited above and the results were not pretty. I have some ideas on how to cope with this problem for those who need or want to be long all the time, but for now my suggestion is to go into cash or buy some Contra ETFs when the next Bear market arrives. Yes, but how does one know when a Bear market has arrived? Simply read the Views. We called the one in March 2000. We called the one in November 2007, and we expect to be able to recognize the next one when it comes. Moreover, I plan to start a Premier Growth Stock portfolio next year so you can use that as a guide.

Right now I'm quite sure that you can maintain your purchasing power by investing in Premier Growth Stocks.

PREMIER GROWTH STOCKS.
This is a strategy that's easy to implement and produces good results. But you have to know the secret to making it work. Like anything else, it's so simple once you know how. So join Mr. Glenn Tompkins at the VectorVest University to see this week's wonderful "Strategy of the Week" presentation: "Premier Growth Stocks."

Four weeks ago I began writing about a $500,000 retirement strategy for people in IRAs or 401Ks that would produce $50,000 per year of current income while maintaining the principal. I said that I would put $200,000 into relatively safe bond funds that were paying about 6% interest and then build three $100,000 stock portfolios with the remaining $300,000. Almost immediately we began receiving calls and emails asking about safe bond funds. That's not our particular field of expertise, but I didn't think it would be all that hard to find such funds, and it's not.

Just recently I went to my bank and put some money into a "Tax-Advantaged Municipal Closed End Portfolio," which is expected to pay about 6.9%. You should be able to do the same if you wish. If you don't want to do that, you can Google the term, "safe bond funds," and get nearly 900,000 hits. The top three listings should more than meet your needs. Of course you can always Google the term, "Pimco," and also receive a wealth of information.

If you don't want to go that route, you can always use VectorVest. Simply click on Viewers on the Main Menu Bar, click on Sector Viewer, click on ETFs, right click on the ETFs row, click on View Industries in Business Sector, sort By Industries Asc, click on ETFs(FixedInc\Other), right click on the ETFs(FixedInc\Other) row, click on View Stocks in Industry Group and sort by DY. You should see JNK at the top of the list with a DY of 12.29%. Overall, you should see nine ETFs with dividend yields of 6% or more. Pick your poison.

As you can see, even in the world of zero percent Federal Funds rates, you can still find Relatively Safe Bond Funds Paying 6%.

ATTENTION REALTIME USERS.
Have you run any searches using double crossovers? Try it, you'll love it. I've been experimenting with a search that finds stocks having a 20 day DPO crossing above zero and MACD crossing above the signal line within the last two days. The search also find stocks with Price greater than $1.00, AvgVol > 100000, and %PRC < 100. It is sorted by %PRC Desc. It has found some really big winners, and virtually all of the Quick Tests I have run, of which there have been many, have given positive results.

DON'S DIVIDEND DANDIES.
Would you like to buy stocks with the highest combinations of Dividend Yield and Earnings Yield? Then sort them by DY*EY. Ah, but there's more to it than that. Mr. Don Thornton, one of our best instructors, will show us the magic little twist that produces the best stocks with the highest DYs and EYs. So join Mr. Thornton at the VectorVest University to see this week's "Strategy of the Week" presentation: "Don's Dividend Dandies."