There I was, like a big, fat cat, waiting to jump on its prey. So I waited and I waited. Upon occasion, I thought I had picked up the scent of a rally, but it never happened. The ball game had changed and I have to make adjustments. What will they be?

Let's take a look at the Market Timing Graph in the All Weekly Mode. Look at the years prior to March 2003. You can clearly see that during this time, you could have made lots of money by selling your long positions and going short when the Buy/Sell Ratio, BSR, went to 3.0 or above. Another good sign of a top was that given by our Market Timing Indicator, MTI. When it went above 1.60 and then fell below 1.60, you could bet that a downturn was in store.

Having had these signals hammered into my head for a number of years, I was dumbfounded on June 6, 2003 to see the BSR soar to the lofty level of 7.54 and the MTI hit an all-time high of 1.72. My old rules were telling me the market was way overbought. It was time to sell. Sure enough, the BSR plunged to 1.36 and the MTI fell to 1.11 by August 8, 2003. The only problem was that the Price of the VectorVest Composite, VVC, went up, not down. Obviously, this market was different.

Now let's return to the present. During the great bull market of March 2003 to July 2007, I learned that you could bet the farm on a rally when the BSR went from below 0.20 to above 0.20. So when the BSR peaked at 2.36 on 10/09/07 and fell to 0.14 on 11/26/07, I wasn't the least bit concerned. I knew that stock prices would fly higher shortly thereafter. Indeed they did, but the rally from the 11/26/07 low lasted only ten days and the BSR climbed to only 0.51 at the high point of the rally. The next rally, from 12/17/07 to 12/26/07, lasted only six days and the BSR hit a high of only 0.47. Once again, something had changed.

So there I was a couple of weeks ago, like a big, fat cat, waiting to pounce upon the next rally. I was in cash, so I could wait. But the rally never came. What I saw instead, was a series of single day up moves getting stifled time after time with many of those promising days turning into routs. Even today, a nice up move at the open has turned into a downer.

Well I didn't wait until today to figure out what was going on. I wrote about it last week. The Pros have gone from buying the dips to selling the rallies. This is what they were doing prior to the great bull rally of 2003. Then they switched to buying the dips during the summer of 2003. Now they have returned to their old modus operandi. Putting this view on the table upset some people, but I have to call it like I see it.

What I see now is that we have to go back to using the old rules. We have to be more cautious when going long, quicker to take profits at tops and more aggressive when going short. Yes, there will be rallies and some of them will be terrific. But they'll last only two to four months instead of four to eight months. Fortunately, there are lots of ways to make money in a down market and we'll be using them as we go along. The market has changed. That's The New Reality.

USING LONG STRADDLES.
Is the market going up? Down? Whatever. Straddles allow us to make money either way, just so it does one thing or the other. Mr. Glen Tompkins will show us how this works in this week's "Strategy of the Week." Visit the VectorVest University to see it all.