The Truth Chart was introduced in March 21, 2003. It presents eight stock market scenarios, four bullish and four bearish, depending upon the particular combination of earnings, interest rate and inflation trends existing at that point in time. These trends are shown in the Investment Climate Section of the Views each week. Moreover, I have written essays on the Investment Climate and the Truth Chart on the following dates: 03/28/03, 10/24/03, 04/16/04, 03/11/05, 04/22/05, and 10/07/05. The whole purpose of this work is to recognize and prepare for forthcoming bear and bull markets.

We are now in a Case 3 Bull Market Scenario. This case exists when earnings and interest rates are rising while inflation is trending lower. You may see 10-year graphs of our inflation indicators, the Consumer Price Index, CPI, and the Commodity Research Bureau Index, CRB, by clicking on Graphs on the Main Menu Bar and selecting Market Climate Graph. The CPI graph shows that it bottomed in 2002 at a 1.10% year-over-year rate, and moved to a recent high of 4.7% in November 2005. By falling to 3.60% this month, its trend indicator rose to above 1.00. Since a lower inflation rate is deemed to be favorable for stock values, this indicator goes above 1.00 when the inflation trend is down.

The CRB graph shows that it hit a major bottom of 184.49 in October 2001; then proceeded to move upward, relatively steadily, to a recent high of 346.96. Currently, it stands at 333.18 and its trend indicator stands at 0.92, saying that the CRB Index is still rising.

We concluded that inflation is falling by noting that the average value of the CPI and CRB indicators is above 1.00. This happy event occurred briefly in June and July of last year, but did not reappear until this month. The Truth Chart says that Case 3 Bull Market Scenarios don't last long. The reason is that interest rates typically go up when inflation is rising, not falling. So what's it going to be? Is the Fed going to stop increasing interest rates or is inflation going to start rising again?

So far this year, the market has had one rally after another on dreams of an early end to the Fed's interest rate increases. But let's look at the facts. Dr. Bernanke, Chairman of the Federal Reserve Board, has been on the job for only two months. He has to show that he is tough on inflation. So chances that he will put an early end to interest rate hikes are virtually nil.

As for inflation, just take a look at the graph of the CRB Index. It shows little sign of reversing the uptrend started in October 2001. Indeed, prices of copper and platinum are hitting all-time highs and gold and silver are at 25-year highs. Many analysts believe the bull market for raw materials will last another ten years. Then there's oil. It may have sporadic drops in price, but only a global recession will cause a lasting price decrease to occur. And a global recession is not in the cards right now. So inflation will begin to rise again, and the Case 4 Bull Market Scenario will return. That's not so bad. We've been there before and made money. We'll soon be saying bye, bye to the Case 3 Bull Market Scenario.

IMPROVED HISTORICAL ACCURACY.
VectorVest has improved the historical accuracy of its database in regard to a stock's historical exchange identity and to its option status. VectorVest Online is already live with the new database changes, so there is no update required. If you use VectorVest ProGraphics 6.0, there is an update that must be installed. You also need to download stock data through March 29, 2006 to complete the process. The ProGraphics 6.0 update may be downloaded and installed by clicking on "Help" and then "Check for Updates" in the program. Simulator users also need to install an update by clicking on "Help" and then "Check for Updates" in the Simulator.

It is not necessary to do this, but you can check to see that your database has been corrected by looking up the historical data on NTRI. First, find Nutri Systems in the Stock Viewer. Then click on "History" on the local toolbar. Click on "Layout" and add "Exch" from the "Columns to Hide" to the "Columns to Show" and move "Exch" up to the top of the list. Next click "OK". Now scroll down the data and notice that on 5/13/04 Nutri Systems moved from the
Bulletin Board "B" to the American "A". You should also see that NTRI became optionable on the American "xA" on 6/6/05, and finally it became optionable NASDAQ "xO" on 6/23/05. Thank you for your continued support, and we hope you are looking forward to future improvements as we strive to give you the best service possible and Improved Historical Accuracy.

MARCH MADNESS.
Two weeks ago, I said I was betting on all of the lowest seeded teams in the NCAA Basketball Tournament. Boy did I get clobbered. Not one of my No. 1 seeds made it to the Final Four. This hasn't happened in 21 years. My only consolation was that only one person in the entire office pool has one team, UCLA, in the Final Four. Oh well, my system worked well in the past and it was easy to do. It got me this year, but I'll be back next year for March Madness.

I received a letter a few weeks ago from a relatively new subscriber who professes his faith in VectorVest and has bought many of his friends into the service. They have been having a hard time lately, so he writes that "We have found that VectorVest, for better or worse, has turned us into day traders. We cannot resist tweaking our portfolios as our picks rise and fall on the VST scale. Two of my followers cannot cope with the rollercoaster ride that this volatile market is creating. Their nerves can't take it and they are about to abandon ship."

I can understand what he's saying here, but then he goes on to say, "The one thing we have concluded is that most, but not all, of the stocks that float to the top of the VST scale could probably be classified as micro-cap stocks, which of course would be lower than low-cap stocks." Yes, I admit some very small stocks do rise to high levels on the VST list, but I would disagree that most of the high VST stocks are micro-cap or even small-cap stocks. The average capitalization of the stocks in the S&P 600 Small-cap Index is $1,129 million. The lowest capitalization was $61 million. As of yesterday, the average capitalization of the top 50 VST stocks was $3,844 million and the lowest capitalization stock was $60.96 million. So the problem isn't stock capitalization. Portfolio management is the problem.

Several months ago, from November 18, 2005 to December 23, 2005, I wrote a series of essays on the performance of high VST-Vector stocks. We actually ran a series of 18,711 tests to see how well these guys had performed over the last ten years. The results were stunning: portfolios of the top 20 VST stocks made money 99% of the time and beat the S&P 500 95% of the time when held at least one year. Visit our web site and prove it to yourself. High VST stocks go up in price over time.

So how does one take this select group of stocks and turn it into profits?

On December 9, 2005 we illustrated a strategy called, "High VST Rebalancing." It produced an annualized rate of return of 61% and is so simple to implement it wants to make you laugh. All you need to do is buy the top 15 VST stocks and hold them for a year. Sell them at the end of a year and use the money to buy another batch of 15 top VST stocks. Of course, the results will vary according to your starting date. But don't worry about it. You can get a good idea of what to expect from this strategy by reading my essay of December 9, 2005 called, "Rebalancing Studies."

So what would have happened if the writer of the above mentioned letter had simply bought the top 15 VST stocks as shown in Stock Viewer on December 9, 2005 and held them until yesterday? Quick test shows he would have been up 7.35%, 25.79% annualized, with 8 winners and 7 losers. That's not so bad, but don't you think he could have done better with some astute portfolio management? Let's see. I ran a 15 stock portfolio over the same time period, managed Daily, sold on "S" Rec and repurchased as necessary. I got a 3.82% gain with 10 winners and 20 losers. Hmm. That didn't work. Let's try managing Weekly instead of Daily. I got a gain of 8.16% with 12 winners and 11 losers. Golly be! This takes me back to the good old days when we didn't sit in front of our computers and micro-manage our portfolios all day long. Was this just plain luck?

To find out, I fine-tuned this basic strategy a little bit and ran 157 portfolios using the Simulator and varied the starting date weekly from January 3, 2003 to December 30, 2005. All tests ended on March 17, 2006. All but two of the tests made money and produced an average annual rate of return of 26.84% with an average of 48.69% winning trades. Not bad. But here's the rest of the story. I got better results by simply rebalancing a 15 stock portfolio of high VST stocks once a year. By starting on 01/03/03 and rebalancing once a year, I got a gain of 198.15% with 63.33% winners. So it seems that the less work you do with high VST stocks, the more money you make!

I can't believe that there's not a way to beat rebalancing once a year, and I need your help to prove it. Here's what we're going to do. We're going to have a competition in which I challenge you to design a portfolio management system for buying and selling the top 15 VST stocks that outperforms the rebalancing results shown above.

In this contest, you will start with a hypothetical $100,000 on 01/03/03, use $9.95 per trade, no margin, do not account for interest, open and close positions on next day's average, use an optimum number of positions of 15 long, do not hold more than 10% of outstanding shares in a company, automatically replace positions when auto-testing and use any stop criteria, Daily or Weekly, you wish.

You must buy 15 stocks on 01/03/03 using the search Price > 0. You may not modify this search or use any other search at any time. You may invest and redeploy funds in any manner shown in Portfolio Manager or the Simulator. You do not have to maintain 15 positions all the time, and you may time the market if you wish. You may not cherry-pick your up and down signals, however. You may not go short. All trading must end on March 23, 2006 and all results must be reproducible by VectorVest.

You must produce a gain greater than 198.15% to be eligible to win an award. The First Place Winner will receive a check for $2,500, Second Place Winner $1,250 and Third Place Winner $625. All valid entries, other than the winners, will receive a $50.00 VectorVest Savings Certificate. All decisions by VectorVest are final. Please send all entries to Keeley Murphy at keeleym@vectorvest.com by May 12, 2006. So let's have some fun. Let's see if we can turn the above mentioned day-traders back into investors. I call it The Chairman's Challenge.

It's that time of year again and I love it. I enjoy getting into the office pool and seeing how close I'll come to picking the winner of the NCAA Basketball Tournament. I don't follow college basketball that closely, so I Googled NCAA TEAM RATINGS. I got over 9,000,000 hits. Wow! Who has the time to go through all of that? Not me. So, I simply picked the lowest seed in every game.

I first wrote about this approach on March 19, 2004, and it worked very well. I used it again last year and it did OK. I didn't pick the big winner in either year, but I had a contender in the final game both times. Not bad for ten minutes of effort. I won 13 out of 16 games yesterday. I know anything can happen in any game, but I feel good about using a simple, sensible approach to getting to the final game of March Madness.

A FEAR INDEX.
An attendee at our recent Executive Premier Workshop in Phoenix asked why the Investment Climate has been unfavorable when stock valuations are so high. This is an extraordinarily good question and well worth some discussion.

Earnings, interest rates and inflation are used in both the analysis of the Investment Climate and in our stock valuation formulas. Each of these assessments tells a story of its own. The Investment Climate deals with trends and reflects the potential consequences of those trends. Stock valuation, however, deals with levels or magnitudes and quantifies their worth in terms of dollars per share.

In the Investment Climate, we track earnings, interest rates and inflation to see whether they are trending higher or lower. Stock Value rises when earnings go up and when interest rates and inflation go down. As shown in the table of Investment Climate Indicators, earnings are rising right now and that's good. Unfortunately, Interest rates have also been rising and that's bad. We got some good news from a benign CPI report this week and that makes the picture look better. Overall, the bad news on interest rates is making the Investment Climate unfavorable.

OK, that's fine, but it doesn't explain why stock values are so high. No, it doesn't, but we must remember that even though interest rates are rising, they are still low by historical standards. They are very low compared to earnings yields. The average earnings yield of stocks in the S&P 500 is 6.70%. This is 14.3% above the interest yield of 5.86% on AAA Corporate bonds and 40.7% higher than the yield on 10-year T-Notes. In addition, earnings are growing at an average rate of 11 percent per year. This is 87.7% higher than the yield on AAA Corporate bonds.

A better question to ask is, "Why aren't stock prices higher?" Ah ha! Now we have something to talk about. The geniuses on CNBC are going ga ga about the Dow going above 11,000 when they should be asking why isn't it at 15,000. The answer, of course, is that they don't have a clue of what stocks are really worth. We do, so why isn't the Dow at 15,000?

I have a theory, but that's all it is. I believe that stocks in this country are so undervalued because investors lack confidence in our leadership. One only need to go back to the Jimmy Carter era to see that earnings yields were much higher than interest yields back then even though interest yields were much higher than they are today. History tells me that EY goes above IY when things are not going well. So the ratio of earnings yield to interest yield is in fact A Fear Index.

Two weeks ago, I wrote about the Market Timing Graph. My primary purposes at that time were to discuss the reversal of the "two-week" signal given by the Price of the VectorVest Composite, VVC, and to show how the rally could easily revert to a downturn. Today I would like to update my analysis of the Market Timing Graph, explain why I'm not crazy about this market and show you how to recognize the best times to buy stocks.

Let's take another look at the Market Timing Graph. You may do this by clicking on Graphs on the Main Menu Bar and selecting Market Timing Graph, Standard. Set the period to 1-year and the frequency to Weekly. Please note that starting from 01/27/06 to today, the Price of the VVC embarked upon a two-week down move, a two-week up move; then a two-week down move. In 15 years of studying this graph, I have never seen a "double-reversal" such as this before. Generally, a reversal happens about once a year and usually reflects an uncertain, wishy-washy market. This market is not only uncertain, but manic-depressive, going wildly up or down on the slightest bit of news. If the people think that The Fed is going to stop raising interest rates because of today's jobs data, they're delusional.

Why am I not crazy about this market? Not only do the two-week and intra-day reversals make it almost impossible to make money, but the chances of a meaningful, sustainable rally are low. The Price of the VVC is up 98% from its October 9, 2002 close and the MTI, BSR and RT have all peaked on or shortly before February 1st. Although the market has lost its upward momentum, the Bulls have not capitulated just yet.

So what do we do now? Let's change the setting on the Market Timing Graph to the All Weekly mode. Notice how the Price of the VVC has gone up and down over the last ten years. Obviously, the best time to buy stocks is at the bottom of each of the major downturns shown on the graph. Of course it's impossible to nail the exact bottom of a downturn and I have never claimed to have done so. But we can sense when a bottom is near and when the market has begun to rally. I've shown how to do this before, but it won't hurt to do it again.

Click the Buy/Sell Ratio button on the graph. Notice that it goes up and down in perfect harmony with the Price of the VVC. Now click the dateline on the oldest, farthest to the left, low point on the graph, i.e., 07/26/96. Notice that the Buy/Sell Ratio, BSR, was 0.11. Click on the next oldest low point on 04/25/97 and see that the BSR was at 0.15. Do this on other low points and you will see that most of the time the BSR was less than 0.20. Therefore, a good way to sense a market bottom is when the BSR has gone below 0.20.

Is that signal good enough to cause me to start buying stocks? No it isn't. I want to see evidence of a rebound before jumping back into the market. Even then, I'd prefer to see an explosive rebound such as those which occurred 05/02/97, 10/16/98 and 09/28/01. A really good time, then, to buy stocks is after the BSR has gone below 0.20 and is followed by an explosive rally. This is just the opposite of what we have today. So be patient. The BSR will go below 0.20 eventually and we'll have an explosive rally after that. This will create a great buying opportunity, and it will be well Worth Waiting For.

RIMM STRADDLE/STRANGLE UPDATE.
The beginning of this story goes back to my essay of February 10, 2006 when I first got into this trade. Basically, it was a great idea and I made some money. But my execution was poor. Not knowing when a real decision was going to be made, I pulled the trigger too fast on my long Calls. Nevertheless, I like the concept and will be looking to do more.