One of my favorite hunting grounds for finding up and coming stocks is the Forbes list of "The 200 Best Small Companies," presented in the October 31, 2005 edition of Forbes Magazine. Regarding this list, Forbes says, "A company lands here by delivering financial performance - namely, growth in sales, earnings per share and a high return on equity. But being a great company is very different from being a great investment. No corporation is so terrific that an overheated stock won't make it into a bad investment choice." So how does one distinguish between a great company and a great investment?


Use VectorVest, of course. I have found that reading about these stocks in Forbes magazine and seeing how they are analyzed and ranked by VectorVest provides me with a great way of knowing what's what. Take Hansen Natural, HANS, the number one ranked stock in Forbes' current list, for example. Would I buy this stock right now? No way. As of yesterday, it had a VectorVest rating of "H" and a VST of 1.15. With an RT of 0.88, its price is in a down trend. Moreover, it's nowhere near a top-ranked VST stock. But, it used to be when it was at a much lower price. HANS first reached a VST level above 1.40 when it was $6.27 a share on March 3, 2004. It appeared on the opening Stock Viewer screen the next day. Subsequently, it appeared numerous times as a top ranked stock in Stock Viewer. Similar examples can be shown for Forward Industries, Sun Hydraulics and Lufkin Industries.

So the simple thing to do is make a WatchList of these stocks to see what's going on. For your convenience, we have prepared such a WatchList and called it the "The Forbes 200/2005." It's located in the Special WatchList Group.

P.S. Medicis Pharmaceutical, which is on this year's Forbes 200 list, appeared in Stock Viewer as our top stock ranked by VST on January 5, 1996. It is up 1,120% since then.

It is a well documented fact that the stock market performs better from November to May than it does during the rest of the year. A significant part of this performance is the much heralded year-end rally. Will we have a year-end rally this year?

The year-end rally has become so entrenched on Wall Street that it often is spoken of as a sure thing. Of course, it's not. However, it has happened seven times out of the last ten years, so the odds are in favor of it happening again. But when is it more likely to happen? It appears that the odds of a year-end rally increase substantially when the market hits a bottom in September or October. Our Market Timing graph shows that year-end rallies occurred in 1998, 1999, 2001 and 2002 after September/October lows. In 1996, the Price of the VectorVest Composite bottomed on July 26th and the ensuing rally, wobbly as it was, carried through to February 14, 1997. The Bull market rally of 2003 began from a March 12th low and sailed clear through to March 5, 2004. Last year, the year-end rally was launched from an interim October low which was actually part of a major rally started from an August bottom.

After a great eight month rally, there was no year-end rally in 1995, as the market fell from September into the final week of January 1996. In 1997, the market peaked on 10/10/97 and failed to rally into the year-end, due to the Asian Currency Crises. The Bear market appeared in 2000 and attempts at a year-end rally were consistently defeated by acrimony over the Bush/Gore Presidential election.

So here we are on October 21, 2005 looking at what appears to be an October bottom. If this is true, we should be contemplating a year-end rally. So what makes me think the market appears to be making a bottom? First of all, our Market Timing Indicator, MTI, hit 0.59 on 10/13/05. It had not been that low since 05/20/04, just as the market was beginning a summer rally. The low prior to that was 0.61 on 03/12/03, the day before the awesome Bull market rally of 2003 began. In fact, the only time the MTI has spent more than a week below 0.60 was during the low points of the Bear market of 2000-2002. It was also encouraging for me to see the MTI not go below 0.60 yesterday, Thursday, the 20th, even though the Price of V V C closed lower than it did on Thursday, the 13th.

Another encouraging sign of a bottom, as indicated in last week's Strategy Section, was that the Buy, Sell Ratio, BSR, went below 0.20 on 10/13/05. This event always indicates that the market is oversold and near a bottom. Finally, the Primary Wave, (see Views 06/04/2004), turned to Up last Wednesday, the 19th. While yesterday's sell-off made the Primary Wave turn to Dn again and even though today's rally wasn't strong enough to move the Primary Wave to an Up signal, I believe it's a good bet that we are embarking upon a Year-End Rally.

THE AUTOTESTER IS ONLINE.
I first wrote about the AutoTester on November 19, 2004. The AutoTester is a wonderful tool that makes back-testing a piece of cake. When it was released last January, it could, unfortunately, be used only with our desktop software, VectorVest ProGraphics v6.0. Now, I'm happy to say, it is available on the internet with VectorVest OnLine.

If you're into back-testing and want to see how well the AutoTester works, you may see a demonstration at The VectorVest University. Simply go to www.vectorvest.com/vvuniversity. Once you have logged on, click on the box labeled "Recorded Classes." Click on "Introduction to the AutoTester" at the bottom of the list of classes and you're on your way.

Incidentally, if you have not attended The VectorVest University, please do. You will be delighted with the quality of the courses and I'm sure you will also enjoy seeing The AutoTester OnLine.

Stock prices peaked on March 7th of this year and went into an excruciating downturn that lasted until April 28th. Investors who bought the right stocks in the succeeding rally had a very nice summer. So how does one buy "the right stocks?"

It's no secret that buying rising stocks in rising Business Sectors and Industry Groups in a rising market is a sure fire way of improving your odds of picking winners. Here's one way to go about it:

1. DETERMINE THE MARKET'S TREND. This is incredibly easy to do with VectorVest. Simply look at the Color Guard. On April 28th, it showed three red bars and a DnDn situation. Three trading days later, on May 4th, it showed a green bar and an UpDn situation. Had the market bottomed? On May 6th, it showed another green bar and an UpDn situation. It was time to go shopping.

2. BUY STOCKS IN BUSINESS SECTORS AND INDUSTRY GROUPS WITH RISING PRICES. While I like to look at graphs of all the Business Sectors and the top 30 or so Industry Groups at least once a week, you only need to look at those with RT values above 1.00 for this exercise. On May 6th, only seven Sectors had RT values above 1.00, but 59 Industry Groups had RT values above 1.00. The graph of the REIT Sector shows that its Price bottomed on March 29, 2005 and actually was going up while the market was going down. Its Price crossed above the 40-Day MA on April 25, 2005 and RT had already gone above 1.00. Therefore, it was a good Sector in which to look for stocks to buy. The point here is to look at Sectors and Groups in which Price has crossed above the 40-Day MA and the move has been confirmed by RT going above 1.00.

3. MONITOR YOUR STOCKS FOR SECTOR AND INDUSTRY PRICE TRENDS. As time goes by, you MUST make sure that the stocks you own are in Business Sectors and Industry Groups whose prices are still rising. You may do this by simply right clicking on a stock from any Viewer; then clicking on "View Stocks in Business Sector" or "View Stocks in Industry Group." You may see the RT of the Sector or Group in the data row at the bottom of your screen. You may see a graph of the Sector or Group by highlighting the Sector or Group data row and clicking on Graph in the Local Tool Bar.

If the RT of the Sector or Group is below 1.00, consider selling the stock. Look at the Sector and Group graphs even if its RT is above 1.00. If Price has gone below its 40-day MA and RT is moving lower toward 1.00, be prepared to sell the stock.

4. DON'T FIGHT THE MARKET. If the Color Guard begins flashing red bars and gives a DnDn signal, it usually is wise to sell your long positions. In any case, you should be prepared to sell Covered Calls, buy Puts, use Collars or protect profits in some manner. Do not be dismayed by a market downturn. It is the market's way of setting the stage for another good buying opportunity.

By using the stock selection and portfolio management technique I have outlined here, you'll always be Buying the Right Stocks.

SPITZER'S FOLLY.
Even though New York Attorney General, Elliot Spitzer, was able to wrangle $1.46 billion out of 10 major Wall Street investment houses for biased research, misleading small investors, conflicts of interests and other assorted misdeeds, nothing has changed. The small investor is still being fed a lot of bad advice.

Take the case of Delphi Corp., which went bankrupt last week. A telling article in last Tuesday's Wall Street Journal, "Despite Delphi's Spiral, Some Experts Said Buy," pg. C3, details how several analyst's continued to push the stock even after it was known to be a candidate for bankruptcy. How could they?

I don't know, but they sure weren't using VectorVest. VectorVest gave DPHIQ an "S" recommendation on 09/02/05 and we never looked back. So the big money was paid by the Wall Street sharpies and it was back to business as usual. As far as I'm concerned the whole idea of leveling the playing field is Spitzer's Folly.

The surest way to wreck the economy and bring on a Bear market is to raise interest rates. The Fed has made eleven one-quarter point rate increases since June 2004, (see V V Views 06/10/2004), raising the Federal Funds Rate from 1.00% to 3.75%. It now appears that The Fed will continue on this path for some time to come. So, when will the Bear market arrive?

All subscribers should familiarize themselves with the "Climate" section of these Views in which we track key data relevant to the state of The Investment Climate. Moreover, we identify whether the stock market is in a Bullish or Bearish mode. Currently, the market is in a Case 4, Bull market scenario in which earnings, inflation and interest rates are rising. This scenario is the one in which Bull markets end. (You may learn more about various Bull and Bear market scenarios by reading the VectorVest Views of 03/21/03, 03/28/03, 10/24/03, 04/16/04, 03/11/05 and 04/22/05.) I have repeatedly noted in these essays that Case 4 scenarios can last a long time. This one has been going on since May 7, 2004 or seventeen months. I have also said that the key to knowing when we are in a bona fide Bear market is to identify when corporate earnings start heading down.

So here we are in October, typically a month of major reversals, and earnings reporting season is upon us. Analysts, so far, have been surprised that pre-reporting earnings warnings have been so few. Yes, I said so few. Only about 500 companies have released warnings compared to about 750-900 for recent quarters. But we all know that thousands of companies have been impacted adversely by the devastating hurricanes that ravaged the Gulf Coast. Other companies are beginning to feel the affects of higher raw material and energy prices. So analysts' earnings estimates for the third quarter may be too high. We will keep a watchful eye on these earnings reports and let you know if and when we see earnings starting to go down.

You should also be aware that stock prices will fall sharply before a clear indication of an earnings downturn is evident. Therefore, you want to keep your eye on the Color Guard. It has already informed us that the market is trending downward with a series of yellow and red lights. The MTI has fallen below 1.00 again and we still have the Confirmed Down signal from September 21st. I don't know whether this drawdown is just a temporary blip or the real thing. Nevertheless, it's time to be watchful and prepare yourself for The Next Bear Market.

A LOOSE CANNON.
Mr. Richard W. Fisher became President of the Federal Reserve Bank of Dallas on April 4, 2005. Shortly thereafter, in June as I recall, he appeared on CNBC. I was struck by the flippant manner in which he answered questions. Here was a guy, I thought, that truly loves the limelight. Well, he got it that day. When asked about the Fed's string of interest rate hikes, he said the Fed was in the eighth inning, suggesting that the Fed's interest rate increases were close to ending soon. This comment caused the market to rally and CNBC played the clip over and over all day long.

Last Tuesday, Mr. Fisher helped kill a nice rally and trigger an afternoon sell-off when he said inflation is now near the "upper end" of the Fed's comfort range. This comment suggested that more rate hikes are on the way, just the opposite of what he said just a few months ago. Apparently, he liked the attention and followed up his remarks yesterday when he said The Fed can't "let the inflation virus infect the blood supply and poison the system." Does this guy have a clue of what he's talking about?

Some observers have questioned whether Mr. Fisher has become the unofficial spokesperson of the Federal Reserve Board. I don't think so. After watching Dr. Greenspan, Chairman of the Federal Reserve Board, carefully parse his words and master the art of doublespeak over the last 15 years, I would seriously doubt that he would select Mr. Fisher to be its spokesperson. The last thing we need is someone speaking for The Fed who is A Loose Cannon.

SYNTHETIC LONG STOCK.
The thing I like most about call options is that they give you the opportunity for unlimited profit potential with limited downside risk. They also provide about ten-to-one leverage. This allows you to invest in high priced stocks on a poor man's budget. For example, when Valero Energy, VLO, broke out of its slump last May, I bought 10 January 70 Call option contracts for about $9,000, not counting commissions. It would have cost me $67,840 to buy 1,000 shares of stock. The most I could lose on the 10 option contracts was $9,000. Theoretically, I could have lost the whole $67,840 had I bought the stock.

Being the cheap so and so that I am, however, I didn't even want to lay out the 9,000 bucks for the call options. So I also sold 10 VLO January 70 Put option contracts for about $8,000. My net cost for these positions was about $1,000 or $1.00 per share. That's nice, but to save the $8,000, I increased my risk of loss to $71,000. I didn't mind this because I thought the risk of VLO going to zero was zero and I was going to buy the stock anyway. Fortunately, VLO ran up to $116.12 a share and I had a paper profit of over $36,000. VLO got whacked this week and so I ended up taking about $30,000 profit on the trade. Based upon my net cost, that's a 2,900% gain in less than six months.

There's a lot more to placing and managing long synthetic stock option positions than I've indicated here, but I prefer to make this trade than to buying high-priced stocks. Please see my essay of 12/17/04 for more information on Synthetic Long Stocks.

SPECIAL NOTE: DO NOT TRADE OPTIONS UNLESS YOU KNOW WHAT YOU ARE DOING. YOU MAY RECEIVE A FREE INTRODUCTION TO OPTIONS AT THE VECTORVEST UNIVERSITY, PURCHASE OUR OPTIONS COURSE ON CDs OR ATTEND ONE OF OUR LIVE OPTIONS COURSES.