In reviewing my essay, "The Year Ahead," which I wrote at the end of 2007, I said, "I don't think 2008 is going to be all that good for stock prices." I also asked, "Where's the spark going to come from to push stock prices higher?"

In addressing this question, I noted that, "Even though 2008 is the fourth year of the election cycle and fourth years have been very good years for stock prices, I'm not expecting much for next year. President Bush is a lame duck president and has very little ability to influence much of anything in a positive way." Indeed, when President Bush and the Republican Party lost their clout as political leaders in the 2006 mid-term elections, a free-for-all emerged among politicians of both parties to curry voter's favor by spending big bucks. With stock prices crashing and the economy going down the tube, a $152 billion bipartisan stimulus package was slapped together and quickly signed into law by President Bush on February 13, 2008. Payments of up to $600 for singles and $1,200 for married couples were scheduled to go out to 130 million taxpayers in April and May. While this wasn't an earth shattering event, it set the stage for the only Confirmed Up signal we received in 2008. This rally went from April 3rd to June 11th.

On several occasions, astounding actions by Federal Reserve Chairman Ben Bernanke to boost the economy and Treasury Secretary Henry Paulson to salvage our financial system ignited explosive rallies, but they were short-lived. Moreover, the Price of the VectorVest Composite rallied from its October 27th low as it became clear that Mr. Obama was extending his lead for the presidency. It peaked on November 4th, the day Mr. Obama was elected. This was significant because it suggested that investors were placing their bets that Mr. Obama would be the better leader.

Although the Price of the V V C subsequently hit a lower low on November 20th, it began to rally again when President-elect Obama, who now has the bully pulpit, declared that deficits weren't important at this time and he would spend whatever it took to get the economy going again. Messrs. Bernanke and Paulson have also taken up the "whatever it takes" mantle. Not to be forgotten, President Bush instructed Mr. Paulson to use $17 billion of Troubled Asset Relief Program, TARP, funds to bail out GM and Chrysler and another $6 billion to save GMAC. So how does all this affect 2009?

It tells me that we will see some incredible market rallies in 2009. When Mr. Obama is inaugurated, it will be reported as though our savior has arrived. Whatever he says and does will be greeted with awe and stock prices will soar. Mr. Obama wrote a book called "The Audacity of Hope: Thoughts on Reclaiming the American Dream." Whether you agree with it or not, this is what investors want in 2009: A Year of Hope.

The financial theme song for 2008 should be Stephan Sondheim's poignant ballad, "Send in the Clowns." It was written for the musical, A Little Night Music and it was sung by a 40 something actress who was rejected by a former lover. Overcome by regret, sadness, self-pity and anger, she sings the song, "Send in the Clowns." It ends with the desperate lines:

But where are the clowns
There ought to be clowns
Well, maybe next year.

"Send in the clowns," is a theatrical term used when things haven't been going well. In other words, the clowns are supposed to liven up the act. For millions of investors, things certainly have not gone well in 2008 and they definitely would like to liven up their portfolios. In 50 years of investing, I have never seen such massive, wide-spread loss of wealth. It is sad, indeed, but what can we do about it?

Surely, regret, sadness, self-pity and anger doesn't do any good. So one needs to examine what went wrong, learn from adversity and get better. I can say this from experience because I grew up during the depression, made a lot of financial mistakes, and faced adversity on many occasions. The key is to identify the root causes of one's adverse experiences and take corrective action to get better. I'm not going to go off on a tangent here, but I've learned more from my mistakes than I ever did from my successes.

The problem most investors face is that it's not easy to identify the root causes of one's failures. The reason is that much of what Wall Street has taught us about investing is wrong. It's not all wrong, of course, but that makes it even harder to know what one has done wrong. To see what I mean, let's consider the recent Business Week article, "Back to Basics," (pg. 44, 12/29/08), written by Mr. Christopher Farrell. It says that while many investing mantras, e.g., the investing trinity of diversifying, buying and holding stocks, and dollar-cost averaging, have been ineffective over the last decade, the old proverbs that preach diversification and dollar-cost averaging remain good advice for anyone investing for the long haul. Well, let's take a look at these items one at a time.

Diversification has not been shown to be ineffective over the past decade, so I continue to believe that it remains good advice for anyone's investment strategy. Buying and holding stocks is a flawed strategy. The fact that stock prices are back to 10-year lows is a sordid reminder of that. Dollar-averaging has indeed been ineffective over the last ten years and it is not good advice for anyone. Since it entails buying stocks going down in price, dollar-averaging is a sucker's game.

Legendary money manager, Bill Miller, destroyed his reputation as a premier fund manager by buying Citigroup, AIG, Freddie Mac, Wachovia, Bear Stearns, Washington Mutual, Countrywide Financial and other stocks as they were getting crushed. His fund dropped 58% this year and he now says he's working on new strategies to improve performance. Mama mia, Send in the Clowns.

P.S. For more information on dollar averaging, please click on Views, VectorVest Views, then click on Search Views at the top of your screen, type dollar averaging in the Search Text box; then click on Search at the bottom of your screen. You may also search for dollar averaging in our Blog at www.vectorvest.com.

Bush's $14 billion auto bailout? Baloney. Blagojevich's senate seat auction? A choir boy gone bad. A negative CPI? Japan, here we come. Zero interest rates? Japan, here we are. Bernie Madoff's $50 billion dollar Ponzie scheme? Now that's news.

Bernard L. Madoff's name has dominated the financial news since he was arrested last week. And the finger pointing has begun. How could he have possibly gotten away with such a blatant scam for so long? Where was the SEC? Mr. Christopher Cox, Chairman of the SEC, says he too would like to know the answer to that question. So he has launched an investigation. Yes, Mr. Cox said that several credible warnings of wrong doing were ignored by the SEC and he wants to know why. The Wall Street Journal reported (pg. A1, 12/18/08), that "Harry Markopolos - who once worked for a Madoff rival," spent nearly a decade trying to convince the SEC that Mr. Madoff's returns, (12 %/yr., year-after-year with nary a drawdown), were too good to be true." In 1999, Mr. Markopolos wrote a letter to the SEC, claiming that "Madoff Securities is the world's largest Ponzie Scheme."

Like every other government agency, the poor, little old SEC was too understaffed and overworked to pay much attention to Mr. Markopolos. Yet, its examination and enforcement staff had grown to nearly 2,000 people with a budget of more than $900 million since the Enron debacle. So the clamor for more staff, more money and more regulation is on again in full force. Will that eliminate fraud and deception?

I don't think so, but there are lessons to be learned. Mr. Steven Pearlstein, business columnist for the Washington Post writes, (The Charlotte Observer, pg. 4D, 12/18/08), that, "The solution is obvious. Turn these firms into something akin to a regulated public utility." Oh, me. It sounds like this guy has been living in Washington too long. Mr. Daniel Henninger, highly regarded columnist for the Wall Street Journal writes, (pg. A17, 12/18/08) that, "The Vosey Inheritance, a play by Harley Granville-Barker, 1914, should be on Broadway or on television. Why? To learn a few things about money that we manifestly do not wish to know."

Hmm. Do you think that maybe some of Bernie's clients knew what was going on and didn't want the music to stop? I don't know, but I do feel sorry for those who didn't know what was going on and lost their fortunes. No one should go through that, but you can't count on government bureaucrats to protect you. Learn how to protect yourself. One of the easiest and best ways to reduce risk is given in my Special Report, "Guide to Worry-Free Investing." It is to diversify in what you buy and when you buy. Do not put all your eggs in one basket. Do not bet the farm on a single trade. These are the lessons, old lessons, to be re-learned from The Madoff Take-A-Way.

P.S. For more information on mitigating risk, please click on Views, VectorVest Views, then click on Search Views at the top of your screen, type Asset Allocation in the Search Text box; then click on Search at the bottom of your screen. You may also search for Asset Allocation in our Blog at www.vectorvest.com.

AMAZING RACE.
Two weeks ago, I wrote a snippet about how much I like the QuickFolio tool in VectorVest RealTime. This week, I was actually shocked by what it showed me. Here's what happened.

On Tuesday, 12/16/08, I prepared a QuickFolio of each of the five Strategies identified in that night's Views. The next morning, Wednesday, I was sitting at my computer, looking at these portfolios in V V RealTime and waiting for the market to open. It was like sitting at the track waiting for the horses to break out of the gates. Well, the opening bell was rung and our portfolios began to move. Apparently investors were having a hangover from Tuesday's celebration because our portfolios weren't doing so good...except for Jubilee, that is. It shot out of the gate and never looked back. At one point it was up over 17%. Yesterday, a down day for the market, the Jubilee portfolio I created on Wednesday night was up again, big time...over 11%. Today's Jubilee portfolio didn't do so hot, but Langer's Longs was up 5.41%. At 10:47 AM it was up 7.79%. We got in at 10:15 AM when the NASDAQ was up 2%. Imagine how much money you can make by placing your bets on this Amazing Race.

At 26 weeks, the current downturn, which was signaled by a C/Dn on June 11, 2008, is the longest we have recorded in the VectorVest U.S. database, which goes back to June 1995. In fact, it's the longest downturn we have encountered since going into business in January 1988. When is it likely to end?

Well, I really can't answer that question, but I'll know it when I see it. I'll know it because our Market Timing System will give a Confirmed Up, C/Up, signal at that time. In order to get the C/Up signal, the Price of the VectorVest Composite must go up, week-over-week, on any given day for two consecutive weeks and the Buy/Sell Ratio, BSR, must go from below 1.00 to above 1.00. The beauty here is that we can see this signal develop as it happens.

The first step in this process is that the Price of the V V C must go up week-over-week for a single week. This event is noted in our Daily Color Guard Report by saying that the Primary Wave is Up, and the Up signal is then logged into the Trend column of the Color Guard Report. If we access the Timing section of last night's Views, we can see that the Primary Wave was Up on November 26th and 28th, and it has been Up for the last four days. As I write this essay, the Primary Wave is Up by a scant 10 cents per share. Nevertheless, five consecutive up days is very encouraging. Moreover, we could also see a couple of Green lights in the Price column.

The next significant step is to see the Price of the V V C go up week-over-week on any given day for two consecutive weeks. When this happens, we say that "The Price of the V V C has given a preliminary signal of a sustainable uptrend." If you look at our Market Timing Graph in the Weekly Mode, you'll see that a string of five consecutive Up weeks started on July 18, 2008. So I checked the Strategy section of the July 25, 2008 Views to see if we had properly documented the two week signal. Sure enough, these very words were there for all of the world to see.

Things appeared to be going pretty well with the incipient rally and our Market Timing Indicator, MTI, was even bold enough to close above 1.00 on August 11, 2008. But all was not well. The BSR was at a lowly level of 0.58 and it needed to go above 1.00 to confirm the rally. Moreover, the traditionally tough months of September and October were looming ahead. So what's all this got to do with what's happening now?

Right now I'm seeing shades of 1990. You may recall that the market peaked in July 1990 and the economy was in the tank due to rising interest rates. In addition to that, the banking industry was losing tons of money on foreign loans and the U.S. government was spending $200 billion trying to recover from the S&L Crisis. Finally, Saddam Hussein invaded Kuwait on August 2nd, threatening our oil supplies and caused stock prices to plunge. The BSR crashed to the lowest level, 0.04, I had ever seen in the short history of VectorVest.

Around the end of October an amazing thing happened: The BSR started to go up. It seemed crazy. With all the problems facing investors, why would stock prices be going up? We could ask the same question today. Whether we know the answer or not, the BSR has begun to rise again. It closed at a 48-day high of 0.10 on Wednesday, December 10th. Now that's not very high, but it is a good sign.

Other good signs are that the Price of the V V C closed above its 40-Day Moving Average on Wednesday, December 10th, and the MTI also closed above 1.00. Altogether, I'd say we're seeing Signs of a Revival.

TAMING THE TIGER - PART II.
We could get a signal of a sustainable rally as early as Monday's close. Are you prepared to buy great stocks at bargain prices? Can you cope with the volatility? Can you handle the risk? Never fear. Todd Shaffer is here. He will show us how to lock in the right time to purchase great stocks with relatively small cash outlays and minimum risk. Visit the VectorVest University to see Mr. Todd Shaffer's intriguing "Strategy of the Week" presentation, "Taming the Tiger - Part II."