In Wednesday's Strategy section, we said "While the MTI and RT matched their August 16th lows, the BSR still has not done so by closing at 0.15 versus 0.10 on August 16th and the Price of the VVC has also not matched the August 16th low. Therefore, there still may be some room to move to the downside, but the market is terribly oversold, making an explosive rebound possible. Bottom line, it's too late to sell short." What does all this mean?

First of all, the Price of the VectorVest Composite, VVC, is the primary indicator we use to track the market's movements. When the Price of the VVC goes up, the average Price of over 8,300 stocks in our database has gone up; when it goes down, it's safe to conclude that the market has gone down. A graph depicting the daily closing Prices of the VectorVest Composite may be obtained by clicking on the header labeled, "Market Timing Indicator" shown on the Home Page. This graph, called "Market Timing Graph," also shows a 40-Day, simple moving average of Price in the upper section and the Market Timing Indicator, MTI, in the lower portion.

The Market Timing Graph clearly shows that the Price of the VVC peaked most recently on 10/12/07. Note that on that day the MTI peaked at a level of 1.63. If one sets the dateline on the graph to 10/10/07, they would see that the MTI hit 1.63 even though the Price of the VVC was lower than it was on 10/12/07. In other words the MTI did not confirm the up move of the Price of the VVC from 10/10/07 to 10/12/07. This divergence gave an early warning signal that there was trouble ahead. The 5-Year Daily Market Timing Graph shows that the MTI also gives an early signal that the market is nearing a bottom of a downturn when it hits or goes below 0.60. This is exactly what happened on Wednesday, 11/21/07, when the MTI hit a remarkable low of 0.52.

Now let's replace the MTI on the graph with RT. Note that in the most recent upturn RT peaked on 10/05/07, five trading days before the Price peaked on 10/12/07. This behavior is not unusual. In the prior rally, which went from 03/05/07 to 07/13/07, RT peaked 29 days before the Price of the VVC peaked. This divergence marked the end of the "blast-off" phase of that rally. In regard to downturns, the 5-Year Market Timing Graph shows that the market is nearing the end of a downturn when RT nears or goes below 0.83. It hit 0.81 last Wednesday.

The Buy/Sell Ratio, BSR, is by far the most revealing of the four indicators. The 1-Year Daily graph shows that the BSR peaked on 10/09/07, three trading days before the Price of the VVC peaked, but two days after RT peaked. It is interesting to note that both MTI and RT reached their former peaks of 10/12/07, the day the Price of VVC peaked, but the BSR never did. It moved up a bit, but stayed well below its 10/09/07 peak. So it clearly marked the end of the "blast-off" phase of the 08/16/07 to 10/12/07 rally. The BSR also gave an early warning of trouble ahead as described in my essay of 10/19/07, called "The Canary's Warning." The All-Daily display of the Market Timing Graph shows that the BSR does an excellent job of signaling the bottoms of downturns. In particular, it is time to stop selling short and to begin getting your shopping list ready when the BSR goes below 0.20. Yes, the market can go lower after this event, but you would be playing with fire to continue shorting stocks.

In the current downturn, the MTI led the way down. It hit 0.60 on 11/16/07. The BSR hit 0.19 on 11/19/07 and the RT finally hit 0.81 on 11/21/07. The fact that the MTI and RT matched or went below their August 16th lows last Wednesday while the BSR did not, is fascinating to me. It suggests the possibility that, perhaps, the massive sell-offs are subsiding and stock prices are consolidating for a nice rally. We will get more evidence of this if stock prices go lower but the BSR refuses to go below the 0.15 level hit last Wednesday.

Now I know all of this may sound very complicated to some of you, but just relax. The Color Guard will tell us in the blink of an eye that the downturn has lost its energy when the first green light appears after all those red and yellows. Then it's time to cover your short positions and start going long. Moreover, Mr. John Campbell will walk us through a fascinating interpretation of the Market Timing Graph in this week's "Strategy of the Week" presentation. So visit the VectorVest University at www.vectorvest.com and watch John's presentation on "Calling a Bottom (Updated)."