I'm not a Ron Paul fan but one has to wonder if his efforts to abolish the Federal Reserve Board might not be worthwhile. The Federal Reserve Board is charged with the conflicting task of maintaining monetary stability and full employment. When it acts to accomplish one part of the task, it virtually guarantees failure in achieving the other.

Inflation is the enemy of monetary stability. A weak economy is the enemy of full employment. The Federal Reserve Chairman strives to fight inflation by raising the interest rate target for Federal Funds. Unfortunately, rising interest rates lead to a weak economy and unemployment. Then he seeks to stimulate a weak economy by lowering interest rates. Lower interest rates perk up the economy but tend to cause inflation. Currently, the Fed Chairman is in a pickle. He's losing ground on both ends of his task, i.e., inflation is rising and the economy is getting weaker.

Many analysts attribute the current state of economic affairs to former
Chairman, Dr. Alan Greenspan. After all, they say, he was the one who lowered interest rates to one percent and kept them there too long. He was the one who allowed the housing bubble to inflate even larger. He was the one who left poor old Uncle Ben with a disaster waiting to happen.

Well, if you have read my essays of 05/05/06, 07/21/06, 08/11/06, 03/30/07, 06/08/07, 09/14/07, 11/16/07, and 01/11/08, you know I haven't been particularly overjoyed by Dr. Bernanke's management style and performance. So I'm not buying the Greenspan's at fault story. Dr. Bernanke has had plenty of time to show his stuff and as far as I'm concerned he's part of the problem, not the solution. He took the Fed Funds rate to 5.25% when he didn't have to; then he was too slow and too timid in lowering rates. Last Tuesday's surprising 75 basis point cut was reactionary, not well planned. So let's place the responsibility for the pickle he's in where it belongs. This mess is Bernanke's Baby.

WHEN TO GET OUT.
Two weeks ago we learned how to find the best strategies for going long in a new upwave. This week John Campbell will show us "How to Find the Best Exit Strategies" to maximize profits. Getting in is easy. Visit the VectorVest University to see When To Get Out.

There I was, like a big, fat cat, waiting to jump on its prey. So I waited and I waited. Upon occasion, I thought I had picked up the scent of a rally, but it never happened. The ball game had changed and I have to make adjustments. What will they be?

Let's take a look at the Market Timing Graph in the All Weekly Mode. Look at the years prior to March 2003. You can clearly see that during this time, you could have made lots of money by selling your long positions and going short when the Buy/Sell Ratio, BSR, went to 3.0 or above. Another good sign of a top was that given by our Market Timing Indicator, MTI. When it went above 1.60 and then fell below 1.60, you could bet that a downturn was in store.

Having had these signals hammered into my head for a number of years, I was dumbfounded on June 6, 2003 to see the BSR soar to the lofty level of 7.54 and the MTI hit an all-time high of 1.72. My old rules were telling me the market was way overbought. It was time to sell. Sure enough, the BSR plunged to 1.36 and the MTI fell to 1.11 by August 8, 2003. The only problem was that the Price of the VectorVest Composite, VVC, went up, not down. Obviously, this market was different.

Now let's return to the present. During the great bull market of March 2003 to July 2007, I learned that you could bet the farm on a rally when the BSR went from below 0.20 to above 0.20. So when the BSR peaked at 2.36 on 10/09/07 and fell to 0.14 on 11/26/07, I wasn't the least bit concerned. I knew that stock prices would fly higher shortly thereafter. Indeed they did, but the rally from the 11/26/07 low lasted only ten days and the BSR climbed to only 0.51 at the high point of the rally. The next rally, from 12/17/07 to 12/26/07, lasted only six days and the BSR hit a high of only 0.47. Once again, something had changed.

So there I was a couple of weeks ago, like a big, fat cat, waiting to pounce upon the next rally. I was in cash, so I could wait. But the rally never came. What I saw instead, was a series of single day up moves getting stifled time after time with many of those promising days turning into routs. Even today, a nice up move at the open has turned into a downer.

Well I didn't wait until today to figure out what was going on. I wrote about it last week. The Pros have gone from buying the dips to selling the rallies. This is what they were doing prior to the great bull rally of 2003. Then they switched to buying the dips during the summer of 2003. Now they have returned to their old modus operandi. Putting this view on the table upset some people, but I have to call it like I see it.

What I see now is that we have to go back to using the old rules. We have to be more cautious when going long, quicker to take profits at tops and more aggressive when going short. Yes, there will be rallies and some of them will be terrific. But they'll last only two to four months instead of four to eight months. Fortunately, there are lots of ways to make money in a down market and we'll be using them as we go along. The market has changed. That's The New Reality.

USING LONG STRADDLES.
Is the market going up? Down? Whatever. Straddles allow us to make money either way, just so it does one thing or the other. Mr. Glen Tompkins will show us how this works in this week's "Strategy of the Week." Visit the VectorVest University to see it all.

I nearly fainted yesterday when I heard the results of the latest CNBC Trillion Dollar Survey of nearly 60 of America's best and brightest money managers and economists. The top headline: "They are Incredibly Bullish." 89% say the S&P 500 will finish higher this year, more than 60% think it will gain at least 8% in 2008 and only two percent say there is greater than a 50% chance of recession. Given the state of the investment climate as it is, how can they say that?

I learned a long time ago, to never listen to what any of these guys ever said about anything. They're just not telling the truth. It's not in their best interests to do so. They want everyone to believe the stock market will go up so that the suckers buy stocks no matter what happens. It's a variation of the old "pump and dump" scam. So you have to be careful about when you buy stocks to go long.

Never, ever buy a stock when it's falling in price. You've heard it before, it's like catching a falling knife. And never, ever dollar average on the way down. You should dollar average only when a stock's price has stopped going down. And when might that be, pray tell? Obviously, when it has started to go up.

I explained exactly how to know this in my essay, "How to Manage Merck," of 10/01/04. So I have a similar, but not exactly the same, situation today. I'm sitting here, waiting to go long and the market is getting killed. So I have to take my own advice and wait until the market starts going up. So how am I going to know when the market has started going up? I'm going to use our Market Timing System, of course. What I do will depend, upon how aggressive I want to be.

An Aggressive Investor would wait until the Primary Wave gives an Up signal. This will happen when the Price of the VectorVest Composite closes above its price of one week ago. The Price of the V V C closed at $29.41 per share on Monday, 12/31/07. It closed today at $28.43, wiping out the lows of 11/26/07 and 12/17/07, so it would have to go up more than 99 cents per share to close above last Monday's Price. This could happen, but I doubt that it will.

A less Aggressive Investor, one who had ProTrader, would wait until the MACD, as described in my essay of 11/30/07, turned from Dn to Up. This signal is often very close to that of the Primary Wave.

A Prudent-Aggressive Investor would wait until the Price of the V V C rose to above its 40-day moving average and the MTI went above 1.00. This is a reliable signal which is faster than our confirmed signals. If this investor had ProTrader, they would use the classic DEW signal to go long.

Finally, a Prudent Investor would wait for a confirmed, C/Up, signal to know When To Go Long.

P.S. If all of this sounds complicated to you, don't sweat it. David Thornton will show you in this week's "Strategy of the Week" just how easy it really is to know When To Go Long. Visit the VectorVest University to see how it's done. You'll enjoy it.

P.P.S. You might be wondering why I'm waiting to go long while a lot of money could have been made on the short side this week. The answer is simple. The C/Dn signal came on November 1st, more than two months ago, and our key market timing indicators, MTI, RT, BSR, are all well below 1.00. I like to go short at the beginning of a downwave not eight weeks later. I'm concerned that we may be looking at the end of it at this point.