by Dr. Bart DiLiddo
Friday, 03/27/2009
We have repeatedly had such incredible success with our low RT bottom-fishing strategies that some of our subscribers might think that's all they need to do to make money. Yes, bottom-fishing is a great way to make sensational, short-term profits in a bear market, but everyone should recognize that the explosive gains shown by these strategies could be ephemeral. I have discussed this phenomenon before (see my 07/25/08 essay on "Making a Quick Killing") and I have seen it happen over and over again.
When I first created VectorVest I was convinced that the only way to go was to buy high VST stocks in rising markets and sell low VST stocks in falling markets. After a few years, I had to face the facts and admit that some of the worse stocks in the database would explode off of bottoms and some of the best stocks would underperform. If you want to have some fun, check it out for yourself.
Take the bottom of October 9, 1998 for example: If you use UniSearch to find the "Worst Stocks > $1.00," as of that date, and use QuickTest to see how the 10 worst stocks ranked by VST Asc. performed, you would see that they were up 15.49% in one week, 29.14% in two weeks, 39.60% after three weeks, 50.43% after four weeks and so on. These guys just kept going higher and higher. Man 'O Man, they were up 118.75% after one year and up 567.8% as of March 10, 2000, the peak of the Tech Bubble. As of last night, they we're down an average of 40.93% with one winner and nine losers.
Now if you ranked the same universe of stocks by VST Desc., and again use the top 10, you would see that they were up only 2.64% in one week, 5.06% in two weeks, 7.50% after three weeks, and so on. These guys just weren't doing nearly as well as the "worst" stocks. After one year, they were up only 43.93% and as of March 10, 2000, they were up 82.72% compared to 567.8% for the bad guys. But hold on a second, as of last night they were up 212.04% with seven winners and three losers.
So which stocks really were the best and which were the worst? It all depends on how you play the game. If you're an Aggressive Investor, you should go for the low RT bottom-fishing stocks and stick with them as long as they perform. If you're more of a Prudent Investor, I suggest that you take advantage of our bottom-fishing strategies when we recommend them; then transition to high VST stocks when we get a C/Up signal. Yes, I know the "worst" stocks in the example illustrated above soared for over a year, but that's rare and it's not going to happen in a bear market. So, as far as I'm concerned, it's Time to Transition.
P.S. You may be wondering why the "worst" stocks do so well coming off of bottoms and the performance of the "best" stocks is only ho hum. The answer lies in what the Pros do. The Pros become defensive and go into the "best" stocks when the market goes down. They will also short the weaker stocks, driving them into the ground. When they sense a bottom, they'll cover their short positions, driving the "worst" stocks sharply higher. They'll also buy many of the volatile, "high Alpha" stocks, they had previously shorted, driving them even higher. Finally, they'll rotate out of their defensive positions, causing these solid stocks to underperform; then go into high momentum stocks, i.e., high VST stocks, as the rally rolls on.
