While flying to the Toronto Financial Forum last Wednesday, I was pleasantly surprised to see an article in the Wall Street Journal entitled, "The Canada Airline You'll Soon Know." It said, "WestJet Airlines Ltd., may be the best airline stock you've never heard of."

Sure enough, there it was in VectorVest Canada with a solid set of fundamentals and a VST of 1.36. Although it had an "H" rating as of Tuesday, 01/23/07, it got a "B" rating on Wednesday as a result of a 78 cent pop due to the WSJ article. Its history file showed a string of B's dating back to October 5, 2006, during which time its Price had gone from $10.88 per share to $14.91 per share as of Thursday night. Not bad, but its Value of $26.50 per share indicates that there's considerable room to go higher.

The WSJ article told of how the company's business model had been patterned after discounters Southwest Airlines and JetBlue Airways and how Mr. David Neeleman, who launched JetBlue Airlines helped form the WestJet Airlines. The company was founded in 1994 and currently has a 30% share of Canada's domestic market compared to Air Canada's 60%. It has a cost structure which is "significantly lower" than Air Canada's.

I report this story to you because WestJet Airlines is simply another example of the many interesting, successful companies featured in VectorVest Canada. As for me, I wish I could tell you more about the many exciting stocks I have discovered by using this product. As for our Canadian customers, several of them stopped by our booth yesterday and openly expressed their praise and enthusiasm for VectorVest Canada. I thank them sincerely for their support. I'm extremely proud of VectorVest Canada and I am pleased that our foray into the Canadian market is off to A Good Start.

Special Note: The information cited in this overview was taken from VectorVest Canada.

The Price of the VectorVest Composite, V V C, has gone essentially no where since mid-December. Is it time to take some money off the table?

If one looks at our Market Timing Graph in the Daily mode, they would see that the Price of the V V C closed at an all-time high of $28.55 per share on 12/14/06. Our Market Timing Indicator, MTI, closed at 1.50. Eight trading days later, 12/27/06, the Price of the V V C closed at $28.53 and the MTI closed at 1.31. Ten trading days later, 01/12/07, the Price of the V V C closed at another all-time high of $28.56 per share. The MTI closed at 1.25. So we see that while the Price of the V V C has been essentially flat, the MTI was closing at lower highs.

I have illustrated this phenomenon on several previous occasions, most notably during the period from 04/06/06 to 05/10/06. In that case the Price of the V V C was actually going up while the MTI was closing at lower highs. You may also see a more dramatic bearish divergence by replacing the MTI with the Buy/Sell Ratio, BSR. The messages of these divergences are so reliable that I call the BSR the "Canary." It tells us that market risk is increasing when the BSR is hitting lower highs while the Price of the V V C is rising. By the time the canary dies, i.e., when the BSR crosses below 1.00, you should have taken your profits.

Another way of assessing market condition is to use moving averages. The default setting on the Market Timing Graph includes a 40-day simple Moving Average of Price. Since the Price of the V V C often goes below the 40-day MA during a long rally, I note the event, but usually don't react to it. A more reliable indicator is a 20-day and 40-day MA crossover. As of yesterday, the 20-day MA is only five cents above the 40-day MA and it has begun trending lower. It appears that a crossover is almost inevitable. So batten down the hatches folks, the market is Topping Out.

CONTRA ETF'S.
Investor's who may be looking for a convenient way of hedging their long portfolios or making money during a downturn, should consider buying Contra ETF's such as the ProShares Ultra Short series: QID, DXD, MZZ, and SDS.

It is a generally accepted belief on Wall Street that U.S. corporate earnings growth in 2007 will fall short of the blistering pace set over the last four years. This belief is probably true, but will the earnings slow-down be enough to bring the Bear out of hibernation?

I don't think so and my reason for saying so was spelled out in my essay of October 13, 2006. This essay, called the "Bull/Bear Market Indicator," said that the key to maintaining a Bull Market Scenario is rising corporate earnings. VectorVest uses the S&P 500 to track corporate earnings and documents its findings each week in the Investment Climate section of these Views. The weekly data from the Investment Climate may be seen graphically by clicking on Graphs in the Main Tool Bar, clicking on Market Climate Graph; then checking S&P Earnings and S&P Earnings-VV. (Please remember to uncheck the indicators you don't want to see.)

This graph shows that S&P 500 earnings have risen in virtually a linear fashion over the last four years. That's very good. When one computes the percent gains year-over-year, however, we find that they have gone lower and lower each year. This phenomenon reflects the mathematics of dividing a constant number by an ever larger denominator. It also reflects the challenge facing corporate CEO's who are trying to grow earnings at constant or higher rates. The VectorVest indicator, shown in the lower portion of the graph, also reflects decreasing earnings momentum. But not to worry, as long as earnings are rising, this indicator will stay above 1.00 and we will have a Bull Market Scenario.

Referring back to my essay of October 13, 2006, I said we needed to see whether Dr. Bernanke lowered interest rates in time to sustain the Bull market or waited too long and let the economy go into the tank. So far he hasn't lowered interest rates and this was causing some consternation among investors. Recent, favorable economic data, especially lower oil prices, now suggest that the economy will do OK. Although a reduction in interest rates is not imminent, investors seem to have accepted Dr. Bernanke's failure to lower interest rates and are comforted by the hope that lower oil prices will serve the same purpose of keeping the economy going.

Unfortunately, petroleum companies have already begun to warn of lower earnings. Even though their contribution to last year's earnings gains was huge, a good portion of their earnings shortfall will be made up by higher earnings of their customers. Therefore, I do not expect the Bull/Bear Market Indicator to go below 1.00 soon. So sit back, relax and enjoy this quarter's Earnings Season.

Every now and then someone walks into my office with a really neat strategy. This is exactly what Rob McCrady did a few weeks ago. His strategy is called "Use the Rules."

Rob is a Product Development Engineer here at VectorVest and was largely responsible for automating our Daily Color Guard analysis. Anyone who has read the Special Report on the Color Guard, which can be located by clicking on Research in the Main Tool Bar, clicking on Special Reports; then clicking on Color Guard, knows that the whole Color Guard process is driven by rules, rules and more rules.

The underlying thrust of these rules is that of converting the direction of our market timing indicators into a color code. For example, if on any given day the Price of the VectorVest Composite goes up from that same day of the previous week, the event is noted. If the Price of the VectorVest Composite also goes up from the previous trading day, we say that the weekly "up" move was confirmed. The color assigned to this action depends upon the color the indicator had the prior week. If the color on the prior week was red, the new color will be designated as yellow. If the color on the prior week was yellow, the new color will be designated as green. If the weekly movement of an indicator was not confirmed by its daily action, the color will be designated as yellow.

You can see there's a lot of bookkeeping that needs to be done every day to produce the Color Guard Report. So Rob wrote a small program that does this work with the click of a mouse button. In doing so, he committed all the Color Guard rules to memory. Then the idea came of applying these rules to selecting stocks. Bingo. A new strategy was born.

I've worked with this strategy a bit and found it to be quite interesting. It finds an unusual mix of stocks, so I still want to do more work with it. I also want to see if the basic idea of the search applies to Industry Groups and Business Sectors as well as to stocks. In the meantime, you may wish to also work with it. So it's being featured as this week's "Strategy of the Week." Take a look at it. Learn how you can Use the Rules.

THE CANARY IS GASPING FOR AIR.
On Wednesday, the first day of trading U.S. stocks, the market opened sharply to the upside only to be stifled by the minutes from the Federal Reserve's December FOMC meeting. These minutes showed that policy makers are still more concerned about controlling inflation than they are about a weaker economy. Therefore, there is little thought of lowering interest rates at this time. In fact, the Fed is still pondering whether or not they should raise interest rates. This is anathema to investor's ears.

Many observers use the first few days of January trading as an early indicator of what the market will do for the entire year. Forget about it. It just isn't that good. But this is not to say the market is doing well, because it's not. One month ago, I said the VectorVest Buy/Sell Ratio, BSR, the Canary, would "almost certainly go below 1.00 before it goes above 3.00 again." In other words, we will experience a Confirmed downturn before we see another grand rally. Right now it appears to be going that way and The Canary is Gasping for Air.