Six weeks ago, June 11th to be exact, I wrote an essay called, "Tentative Bottom." That turned out to be oh so true. This time, I think it's different.

Caterpillar bulldozed the Bears out of the way yesterday, leading a strong rally with news that its orders are growing and production will increase in the second half of the year. UPS also raised its outlook because of more spending by businesses. These reports support evidence of increasing economic activity as seen by rail shipments which have been increasing for the past several months.

In another good sign, investors pushed bad news on housing and unemployment aside, rationalizing that it could have been worse. They focused instead on earnings reports from a wide range of companies that showed little sign of a slowdown in the economy. This behavior is reminiscent of that at the bear market bottom in March 2009. Is the market ready for a sustainable rally?

As I said last week, the combination of low inflation, low interest rates and rising earnings is the perfect recipe for driving stock prices higher. This week, it finally appears that stocks of companies with great earnings reports are getting rewarded with higher prices. Those companies who missed their forecast got punished. That's the way it's supposed to work. A quick look at our Market Climate Graph shows that forecasted S&P 500 earnings are expected to soar higher into next year.

Going back to the January - February 2009 period, it is interesting to note that the Price of the VectorVest Composite was caught in the jaws of a Wicked-Wedge as it has been recently. Back then the market broke to the downside on February 10, 2009, leading to the March 9th bottom, which we nailed. Yesterday, however, the Price of the VectorVest Composite broke-out to the upside, which I view as a positive sign. This view is supported by the fact that the Price of VectorVest Composite hit the low point of $22.57 per share on 07/06/10. This was only nine cents above the $22.48 per share support level hit on 02/08/10.

The market rallied almost three months from the 02/08/10 support level to a closing high of $26.29 per share hit on 04/23/10. While I doubt that this is likely to happen again, we could see the market rally into the September - October time frame. Exactly 50 trading days passed during the downturn from the 04/23/10 high to the 07/06/10 low. That seems long enough to me. Thirteen trading days have passed during the rebound from the 07/06/10 low to today, and the Price of the VectorVest Composite went up for two consecutive five-day periods yesterday, giving a preliminary signal of a sustainable upturn. The Color Guard also flashed a Green Light in the Price column yesterday.

Now all of this happened several times during the bumpy downturn from the April 23rd high, so don't run out and bet the farm on this rebound. We are not reliving the March 2009 bottom. A nascent rally has begun, however, and we could be seeing A Breakout Bottom.

THE MONEY MAKER.
The up and down price fluctuations we have encountered since the market peaked on April 26th, have made it awfully hard for most stock traders to make money. But those who trade stock Options have found a bonanza. Volatility causes Option premiums to go up, making them more expensive. Therefore, it was a good time to sell Covered Calls. That's exactly what we have been doing in the PayDay Portfolio, which was up 26.64% as of yesterday's close. How does one sell juicy Covered Calls? Mr. Glenn Tompkins, Manager of Educational Services, will show us. So visit the VectorVest University to see this week's money making "Strategy of the Week" presentation: "The Money Maker."

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.
Charles Dickens, "A Tale of Two Cities"
English Novelist (1812 - 1870)

The present is so like that period past, I have an uneasy feeling in my bones. I've never seen a greater disparity of views on what our country should do and where the financial markets are heading. There are those who believe we are all going to hell, while many believe our glory days still lie ahead.

Alas, matters political are beyond the scope of this essay, so let's take the stock market for example. Yesterday, I had just finished watching a video in which the speaker made an extremely strong case for the onset high inflation and rapidly rising interest rates due to our profligate spending, when I saw Mr. Ken Heebner on CNBC speaking enthusiastically about the great bull market that lies ahead. Now I know that there will not be a great bull market if inflation and interest rates run wild. I also know that Mr. Heebner is a great investor, so he could be right. But I take what he says with a grain of salt because he is always bullish and he was bullish throughout the recent crash.

To add to the confusion, yesterday's Wall Street Journal ran a front page article entitled, "Evidence Mounts of Strong Recovery," but yesterday's Jobless Claims report didn't suggest that a strong recovery is on the way. Moreover, Fed Chairman, Ben Bernanke, was reported in the Journal to express an "optimistic but cautious" view of the economy and pointed to a "sharp and dispersed slowdown in inflation." That means he's not confident of a strong recovery and he'll not raise the Fed Funds rate soon.

Finally, I received an unsolicited email from a newsletter writer who has been predicting a market crash for over a year now. He promised to not send anymore warnings until the crash finally occurs. Is today's 126 point drop in the Mighty Dow the start of the predicted crash or are we about to embark on another leg of this great bull market?

I'll take my clues from the Color Guard rather than ponder over A Dickensian Rhapsody.

ATTENTION GOLD BUGS.
You may want to re-visit Ms. Angel Clark's excellent 12/31/09 "Strategy of the Week" presentation, "The Midas Touch." I look at it regularly and it appears to be close to giving a buy signal. As of 04/15/10, the Mining(Gold\Silver) Industry Group has an RT of 1.05 with an RT Rank of 176, so it's still early in this up move if it blossoms.

TGIF: WHEN TO WIN BIG THE EASY WAY.
On February 26, 2010, we introduced you to a "Strategy of the Week" called "Winning Big the Easy Way." It showed how one could trade the 5-Day Derby Winners from Friday-to-Friday and make big profits. The results were so impressive that our users wanted to learn more about the strategy. So we gave another presentation on March 5, 2010 which provided detailed, step-by-step, instructions on how to conduct the strategy. A week later, we gave a third presentation in which we illustrated how one might implement the Strategy on days other than Friday. Since then we have tested the Strategy in detail to see how it performed on each day of the week. You will be surprised by the results we obtained. So join Mr. Todd Shaffer, Manager of Research, at the VectorVest University to see this week's startling "Strategy of the Week" presentation: "TGIF: When to Win Big the Easy Way."

Exactly four months ago, on October 19, 2009, the Price of the VectorVest Composite closed at $23.61 per share. Yesterday it closed at $23.64 per share. During this four month period it hit a low Price of $22.03 and a high Price of $24.45. How does one make money in a flat, herky-jerky market?

Last week I said one needs to "see through the market's daily gyrations and stay with the prevalent trend." I then described a method of doing this by using the Enhanced ProTrader Market Timing Graph, EPMTG, and the Daily Color Guard. We also gave a "Strategy of the Week," SOTW, presentation which illustrated the efficacy of the technique. We also used the technique in last Friday's Views to explain exactly what to do should the market move higher, as we expected, on Tuesday and we suggested five Strategies to use for your stock selections.

Indeed, the market did open higher on Tuesday, February 16, 2010, and the stocks in the Strategies we had suggested took off like birds. At the end of the day, QuickTest Portfolios of the top 10 stocks from each of the five suggested Strategies showed an average gain of 3.78% with 45 winners and five losers. As of 12:15PM, today, February 19, 2010, these same five Portfolios are showing an average gain of 6.21% for an annualized rate of return of over 300%. Fantastic!

So what are Derby Leaders and how does one find them? Derby Leaders are the five Strategies which are showing the highest cummulative percent gains from the day the Color Guard gives a Red or Green Light in the Price Column to the end of the current day. The Color Guard showed a Green Light in the Price column last Friday, February 12th, so we reported the five Strategies with the highest percent gains for that day. On Tuesday, February 16, 2010, we reported the five Strategies with highest total percent gains for the two day (Friday to Tuesday) period. On Wednesday, we reported the five Strategies showing the highest total percent gains for the three day (Friday to Wednesday) period, and so on.

These Strategies are extremely easy to find since we give them to you in the Strategy section of the Daily Color Guard Report shown on the Home Page of VectorVest U.S., and in the Views of both VectorVest U.S. and VectorVest RealTime. Subscribers to VectorVest RealTime who have the Derby Tool can also check them out during the day by using the Tote Board.

We call these Strategies Derby Leaders because we want to differentiate them from the Daily Derby Winners, i.e., the Strategies with the best single day gains. Daily Derby Winners are great to use for finding "hot poppers," but I like to find Strategies that are producing winners on a consistent basis, day after day. Logically, one would think that the Strategies that have performed the best from the onset of an upturn or downturn would be the ones which are consistently producing winners. So we have been illustrating methods of identifying these Strategies. For example, you may refer to the SOTW presentations of 10/09/09, 10/30/09, 11/06/09, 11/27/09 and 02/12/10 to see how this technique has developed.

The results shown in these SOTW presentations as well as those that you will see in this week's SOTW presentation should encourage you to bet your money on Derby Leaders.

HOW TO USE DERBY LEADERS WITH CONFIDENCE.
Mr. Todd Shaffer, Instructor and Product Support Consultant, will be giving a very special presentation this week which will show you how to use the Enhanced ProTrader Market Timing Graph and Color Guard to know exactly when to enter an upwave or downwave and use the Derby Leaders. So join Mr. Shaffer at the VectorVest University to see this week's extremely important "Strategy of the Week" presentation: "How to Use Derby Leaders with Confidence."

P.S. The techniques shown in this week's SOTW presentation are so good that we will be using them in our Daily Color Guard Report videos.

Last week I said that I wanted to take "a more flexible, natural course" to managing the Model Portfolios. This doesn't mean that we're going to discard all the rules and techniques we have used in the past, but with four portfolios, three prudent and one aggressive, being illustrated, it makes sense to focus more on the techniques Prudent and End-of-Day Investors could use in building and managing their portfolios as compared to those that Aggressive Investors and Traders might use. Here are the guidelines of how I plan to manage these portfolios:

WHEN TO BUY. VectorVest believes in buying rising stocks in rising markets, so we will continue to use the VectorVest Market Timing System for guidance on market direction. We will always plan to buy stocks long when the Primary Wave is Up. Occasionally, however, if we think a rally is imminent, we may plan to buy stocks long even when the Primary Wave is Dn.

Before the market opens, we will always check the stock Futures to see if the likely direction of stock prices is in agreement with our plan. If it is, we will proceed with our plan. If the direction of the Futures is not in agreement with our plan, we will wait to see what the market does at the Open. If the Futures indicate that the market is likely to make a big move contrary to our plan, we may abort the plan. End-of-Day Investors should check the Futures as close to the open as you can before placing your orders.

After the market opens, we will make a final assessment of market direction by waiting until the DJI, SPX, and IXIC are all higher than their previous day's close before buying any stocks long.

WHAT TO BUY. Whenever a new campaign is launched, we will recommend at least three Strategies which we deem appropriate for each portfolio. The reason for recommending more than one Strategy for each portfolio is to avoid a stampede into the stocks that a single Strategy would return.

Once we have decided to enter the market, we will select stocks from the top 10 stocks returned by the best performing Strategy, i.e., the one showing the best combination of percent price gain and percent winners. We will buy a stock only if its price is higher than its previous day's High. End-of-Day Investors may use "Buy-Stop-Limit" orders to emulate this technique. See my essay of December 24, 2009 on how to do this.

Although we have traditionally used model portfolios with 10 stock positions in them, we will build some portfolios with up to 20 stock positions because portfolios with 20 positions not only allow more diversification but they also allow the use of a 20% Stop-Loss instead of a 10% Stop-Loss without increasing single-stock risk. Moreover, portfolios with 20 stock, 20% Stop-Loss portfolios frequently perform better than 10 stock, 10% Stop-Loss portfolios.

WHEN TO SELL. Stop-Prices are the first line of defense on when to sell a stock. VectorVest gives a Stop-Price on every stock, every day. These are designed for Prudent Investors, not Traders. Even so, we generally will start out with a 10% Trailing Stop on new positions because we don't want to risk more than 1% of our portfolio value on any single stock position. We often will tighten our Stops when we see the market heading south, i.e., the Primary Wave turns from Up to Dn.

Traditionally, we have exited all long positions by the time the Price of the VectorVest Composite has given a C/Dn signal. We will continue this practice for the Riding-the-Wave and the Yellow Brick Road Portfolios. We will not feel compelled to exit all positions in the High Income and Premier Growth Stocks portfolios because we view these portfolios as suitable for less active investors. However, we will not violate the Stop-Loss criteria we have set for these portfolios.

WHEN TO GO SHORT. We will continue to go short in the Riding-the-Wave portfolio upon receiving a C/Dn signal. We may or may not go short in the Yellow Brick Road portfolio, depending upon market conditions. We will not go short in the High Income and Premier Growth Stocks portfolios.

I'm sure there's more I should have put into this essay, but we will learn what that is as we go forward, Managing the Model Portfolios.

LOW COST INSURANCE - THE COLLAR OPTION.
Many investors have racked up large unrealized profits in their stock portfolios recently, leading many of them to ask, "How can I protect these profits with the increasing uncertainty in the markets lately?" Please join Mr. David Thornton, Director of Sales and Marketing, at the VectorVest University to see this week's terrific "Strategy of the Week" presentation: "Low Cost Insurance - The Collar Option."