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.

I received an email this week chastising me for laughing at the morons on CNBC. I apologize for saying that...but only because I should have been crying. It really saddens me to see how CNBC's "Wall Street" approach to investing has hurt their viewers in this bear market. But CNBC is not alone in this regard, the conventional wisdom teaches us bad practices.

I began investing in stocks about fifty years ago and I've probably made every mistake in the book. My worst mistake was selling all my stocks in December 1974, at the very bottom of the '73-'74 bear market. I was very discouraged because I hadn't made a dime after 15 years of buying and selling stocks. I won't call it investing, but I wasn't a Trader either. Nevertheless, I was so dumb I was lucky I didn't lose my shirt. Yes, I had a broker from Merrill Lynch. Yes, I belonged to an NAIC stock club. Yes, I read books on investing, including Benjamin Graham's Intelligent Investor. Yes, I read Barron's and Forbes and the Wall Street Journal. Yes, I used Value Line. But it didn't do any good because my techniques were bad and I couldn't tell the difference between a Bull market and a Bear market.

For example, my ex-broker always called me when he saw a stock going down in price. He was the expert, so I usually bought it. You know what? It usually kept going down and I was stuck with it. One of my pet peeves with CNBC is that even on the worst down days, they ask, "Is this a buying opportunity? What are you buying now?" It appalls me to see Cramer go into his act, saying, "'Mon back, mon back," urging his listeners to buy, buy, buy on a pullback. Boo-yah, baby...until the falling knife goes through your heart. The bottom line: Never buy stocks on the way down.

Another pet peeve of mine is this business of buy and hold. On June 28, 2008, an article written by Mr. Larry Light appeared in the Wall Street Journal. It was entitled, "What to Do to Survive This Market." It said, "There's a decent argument to be made for buy and hold. Aside from the absurdity of liquidating an entire equity portfolio - the tax headaches would be epic - investors ultimately end up better off than if they had tried to sell at the top and buy at the bottom." Really? I think I'm going to call this guy and introduce him to the "Yellow Brick Road."

Your top priority right now must be to preserve capital. If you haven't already sold your stocks and gone into cash by this time, I don't think you should do it now. But you should learn how to protect your portfolio. Please see my June 29, 2007 essay on Portfolio Protection. Learn how to use Option Collars. If you do, you'll have the money to buy stocks when this bear market ends, producing bargain prices. This is the silver lining. So survive now and be ready to look for The Silver Lining.

PLANNING YOUR RE-ENTRY.
We were hoping to go long two weeks ago, on Friday September 26th, when stock prices went down instead of up. They got crushed the following Monday and havoc has reigned supreme ever since. So why didn't we go short and make a lot of money? Simply because the Buy/Sell Ratio, BSR, closed at 0.09 on Monday, September 29th, and our experience has shown that it's not a good idea to go short when the BSR is below 0.20. In fact, it's the time to think about going long and that's what we've been doing. But we're not going long until we see solid signs of a sustainable recovery. First I want to see an explosive rebound. Then I want to see a good follow-up day. Finally I want to see the Primary Wave flash an Up signal.

We have received the entries to the 2008 Bear Market Beaters Contest and hope to announce the Third Place Winner on April 18, 2008.

A WINNING FORMULA.
Two weeks ago, on March 28, 2008 to be specific, I wrote an essay called "Riding-the-Wave Made Easy." The technique described therein sounded so good, I decided to use it in managing the Model Portfolio. So far, it hasn't worked very well and several problems became apparent. Needless to say, I'm not going to use it anymore.

The major problem with the strategy I tried is that trying to manage the portfolio on an end-of-day basis led to a host of problems. Take the evening of March 31st, for example. Since the Primary Wave went from Up to Dn on that day, I was required to sell my long positions at the open and go short at the open on the next day. Unfortunately, the market went up instead of down on April Fool's Day, and the Model Portfolio got creamed. Not only that, but the market went up so much that day, the Primary Wave went from Dn to Up. Happily, I covered my shorts at the open on April 2nd and went long with Top VST stocks.

By this time, it was clear that there were tremendous disadvantages to Riding-the-Wave on an end-of-day basis. Not only did I have to decide to go long or short before the market opened, but I had to decide what strategy to use. I had learned, long ago, to wait until I saw what the market was actually doing before jumping in and I had spelled out in some detail in my essay of December 23, 2005 exactly how to find the best strategy to use. So I went long with Top VST stocks on April 2nd and crossed my fingers. Fortunately, these stocks performed quite well. All but one, Kirby, KEX, made money. I would have kicked Kirby out as soon as it lost 5%, but the strategy did not use any portfolio management during a wave, which was another problem.

After four wishy-washy days of trading, the market tanked on Wednesday, April 9th and the Primary Wave went from Up to Dn. So I had to sell my longs at Thursday's open and was also supposed to go short. But I didn't do that since I had said in Wednesday's Views that I wouldn't go short unless the market was heading lower. As you might expect, the market went higher. So there I was in cash when I should have retained the right on Wednesday night not to sell my longs.

OK, after the drubbing the market took today, thanks to GE, I don't feel so bad. So what am I going to do now? Well, I'm going to wait until the Primary Wave goes to Up again; then I'll go long on a day the market is moving higher. I'm going to stay long until the Primary Wave goes to Dn, but I doubt that I'll entertain the idea of going short while the MTI and BSR are trending higher.

In a nutshell, I'm going back to what worked for the last three plus years. There's no need to mess with A Winning Formula.

P.S. We're going to work on developing an end-of-day procedure that resolves the problems cited above.

BIGGEST BARGAINS.
The biggest companies in the world didn't get to be that without outstanding management. It's not a bad idea to buy some of these guys when the market rallies from a steep bottom. Mr. Gordon White will show us how in this week's "Strategy of the Week." For further demonstration of this strategy, please see VectorVest University.

Conventional wisdom says that stock prices move in a random fashion and you cannot "time the market." While I would agree that prices of individual stocks tend to be chaotic, our Market Timing Graph clearly shows that the average price of over 8,000 stocks, as reflected by the Price of the VectorVest Composite, VVC, moves in a remarkably deliberate fashion, forming up and down waves as time goes by. It clearly shows that the market is rising when the Price of the VVC goes up and the market is falling when the Price of the VVC goes down. Our job, then, is to ascertain the direction of these trends as they are unfolding.

THE PRIMARY WAVE. Our studies show that day-to-day movements in the Price of the VectorVest Composite are not statistically significant. Week-to-week movements, however, are very much worth noting. When the Price of the V V C is higher than it was one week ago, the Primary Wave is Up. When the Price of the V V C is lower than it was one week ago, the Primary Wave is Dn. The Primary Wave provides a relatively fast, fairly reliable indicator of market direction.

When the Primary Wave changes direction, say from Up to Dn, Prudent Investors should use it as a warning signal that the market trend is showing signs of changing from up to down. They should become defensive, i.e., defer the purchase of stocks, tighten stops, sell Covered Calls, buy Puts and so on. Aggressive Investors and Traders should use this signal to switch from favoring upside strategies to favoring downside strategies. (Aggressive Investors and traders should always key their bias to that day's trading activity). For those of you who are "Riding the Wave," a change in Primary Wave from Up to Dn should be a signal to stop replacing long positions and to accumulate cash. A particularly strong change in the Primary Wave may be used as a signal to go from long to short positions. This information is presented in the Daily Color Guard Report.

THE TWO-WEEK RULE. Our studies show that a slower, but more reliable signal of market direction is obtained by analyzing the two-week movements of the Price of the V V C. When the Price of the VVC goes up two weeks without an intermediate down week, it gives a preliminary signal of a sustainable Up trend. When the Price of the VVC goes down two weeks without an intermediate up week, it gives a preliminary signal of a sustainable Dn trend. You are invited to look at our Market Timing Graph in the weekly mode to see how well the Two-Week Rule works. Over the last 13 years, the two-week signal has been reversed by a two-week counter move only about once a year.

When a signal from the Two-Week Rule changes direction, say from Up to Dn, Prudent Investors should recognize that the market has gone from an uptrend to downtrend. They should implement the defensive actions cited above and also consider selling their weaker stocks. Aggressive Investors and Traders should use this signal to implement downside strategies such as selling stocks short and buying Puts. Again, these investors should key their actions in accordance with that day's market activity. For those of you who are "Riding the Wave," a change in the Two-Week signal from Up to Dn should be a signal to go into cash and to go short if that day's market activity is downward. This information is also presented in the Daily Color Guard Report.

CONFIRMED SIGNALS. The VectorVest Buy, Sell Ratio, (BSR), is an extremely powerful indicator of market conditions. The market is robust when the BSR is greater than 1.00 and weak when the BSR is less than 1.00. Therefore, we use the BSR to give confirmed up and confirmed down signals. A Confirmed Up signal is given when the Two-Week Rule has signaled a sustainable uptrend and the BSR has gone from below 1.00 to above 1.00. A Confirmed Dn signal is given when the Two-Week Rule has given a signal of a sustainable downtrend and the BSR has gone from above 1.00 to below 1.00.

Our experience has shown that the use of confirmed signals to buy long on Up signals and sell short on Dn signals is far superior to employing simple buy and hold strategies. Confirmed Calls work best in markets having sustained uptrends and long downtrends. The Confirmed Dn signal we gave on March 17, 2000 was the most crucial we have ever given. The Confirmed Up trend from March 21, 2003 to March 15, 2004 was the longest we have ever seen. So Confirmed signals should not be ignored. It is important to recognize, however, that confirmed signals are often slow in developing.

To cite a recent example, the Price of the VVC bottomed on May 17, 2004. The Primary Wave turned from Dn to Up on May 21 and the Two-Week Up signal was given on May 28. A Confirmed Up signal was not given until June 29. The main reason for this result is that market's rally was weak, so the BSR took forever to go above 1.00. Therefore, we have aimed to make timing calls closer to critical turning points, prior to receiving Confirmed signals.

TURNING POINTS. The key to making really big profits lies in making correct market timing calls as close to a turning point as possible. While one can often sense turning points, it is impossible to actually call them with any degree of regularity. Although we have never nailed an exact top or bottom, we have come very close on many occasions. We use a variety of methods to identify turning points as closely as possible and they will be discussed in future essays. For now, you have the essentials of Market Timing Explained.

P.S. Here's how to see the Mining(Gold/Silver) Industry Group take-off.
1. Click on UniSearch in the Main Menu Bar.
2. Click on Delta Searches - Industries.
3. Click on 5-Day RT Delta.
-- Mining(Gold/Silver) should appear at the top of the list.
4. Click on Graph in the Local Menu Bar.
5. Click on the Edit Field List box.
6. Locate RTRanking in the left hand box and move it to the right hand box.
7. Click on OK.
8. Click on RTRanking.
-- On May 13, the RTRanking of this Industry Group was 193. It soared to 58 as
-- of yesterday.

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