As noted in last week's essay, we had received a trading system submission to our $1,000.00 Award Challenge which looked like a winner. The submission we liked the best came from Mr. William Cook of Mission Viejo, CA.

The challenge for the $1,000.00 Award was issued in my essay of August 13, 2010. It was based upon the observation that from August 18, 2009 to August 13, 2010 the VectorVest Tote Board showed that the "Bottom Fishing in Rising Industries" Strategy had a cumulative gain of 104.99% with an Efficiency Factor, EF, of 24.81%. VST Mighty Mites, another great performer, gave a cumulative gain of 85.50% with an EF of 24.48%. These phenomenal performances were achieved during a period in which the Price of the VectorVest Composite gained 13.04%.

The problem here is that it would have been difficult to replicate the performances of these Strategies in real life. One would have had to buy the top 10 stocks returned from the Strategy at the market's close each day, sell them at the next day's close; then repeat the process every trading day. We're talking about 4,980 trades over the test period of 249 trading days. That sounds like a whole bunch to me. So the challenge was "to send in a practical, feasible trading system for capturing the profit potential of these great Strategies." We believe Mr. Cook has submitted the best system for doing what we asked so far.

Mr. Cook is a long-term user of VectorVest who first subscribed in 1998. He left VectorVest for a while; then re-subscribed in 2005. We met at a VectorVest event years ago, but I can't recall the meeting. Nevertheless, his approach to meeting the challenge was novel and easy to understand. To decide when to buy and sell stocks, he used the VectorVest 7 version of the Market Timing Graph which shows pricing data as Candlesticks. He would go long when he saw two consecutive green candles plus an up follow-through day and go into cash when he saw two consecutive red candles plus a down follow-through day. He also used a five-stock portfolio with no Stops and he claimed an 82% gain with 110 trades.

We also received another submission which challenges Mr. Cook's candlestick system, but it has some unusual techniques that require the Simulator to implement. We plan to modify and test both these systems so that end-of-day traders, i.e., the infamous Midnight Cowboys, could use them. In the meantime, we like Mr. Cook's ideas enough to share them with you, so we're sending him a check for $1,500.00. Thank you, Mr. Cook, for Cook's Candles.

COOK'S CANDLES.
For the complete story on how this new trading system works, visit the VectorVest University to see Mr. Todd Shaffer, Manager of Research, explain and illustrate this week's interesting "Strategy of the Week" presentation, "Cook's Candles."

Investors, especially Boomers, want two things: Safety and Income. In the quest to achieve these goals, they took $233 billion out of equity funds and put $559 billion into bond funds from January 2008 to June 2010. Was this a good idea?

Two famous professors from the Wharton School of Business, Drs. Jeremy Siegel and Jeremy Schwartz, don't think so. In an article, "The Great American Bond Bubble," published in Wednesday's Wall Street Journal, page A17, they claim that bond prices are way too high and are fixing to come tumbling down just as internet stocks did in 2000. Mr. David Rosenberg, former Chief Investment Strategist at Merrill Lynch, thinks the "Two Jeremies" are dead wrong, saying that bond prices won't come down anytime soon. (See http://www.businessinsider.com/david-rosenberg-on-the-bond-bubble-2010-8.) Mr. Rosenberg believes deflation is likely to come upon us and low interest yields on totally safe T-Bonds will be looking awfully good compared to negative inflation rates. My position is that Mr. Rosenberg may be right, but I'm not interested in investing my money on a 1 or 2% return.

The "Two Jeremies" suggest that investors consider buying stocks of solid companies such as AT&T, which have a relatively high yield, currently 6.23% on 08/19/10. Mr. Rosenberg doesn't totally disagree with this, but wonders why an investor can't invest in safe government bonds and "safe" stocks. This sounds OK, but who can be satisfied with a return of less than 10% on their money?

I've done a lot of research on retirement strategies since receiving an email last summer from a subscriber requesting assistance in this area, and there's one thing I know for sure. You're never going to get the 10% return you want by buying low yield bonds and so called "high yield" stocks. Actually, I knew this from the moment I wrote my first retirement strategy essay last September. That's why two of the four strategies I described involved the technique of selling Covered Calls on dividend paying stocks. This technique was featured as our "Strategy of the Week" presentation on September 25, 2009 and it has been featured several times since then.

On June 4, 2010, I wrote an essay called, "The PayDay Portfolio." This essay reiterated my conviction that selling Covered Calls on stocks paying high dividends is a relatively safe, practical way of generating 20-30% return on your money. You need to know how to trade Options, however, to properly implement this technique. Therefore, we have illustrated the basic technique several times as the "Strategy of the Week" presentation. (See the SOTW presentations of 09/25/09, 03/26/10, 05/14/10, 07/23/10 and 07/30/10.) We also made it a bonus presentation in our Options Course and have made it available to options savvy subscribers via the purchase of a special PayDay Portfolio Report.

As of yesterday's close, a backtest of a hypothetical $100,000 PayDay Portfolio started on January 8, 2010 shows a Total Value of $130,035.95. I have been trading Covered Calls with real money for several months now in accordance with the rules described in the PayDay Portfolio Report and I'm satisfied that it's the best way I know of achieving both Safety and Income.

TAMING THE TIGER WITH COVERED CALLS.
Ever since the so called "Flash Crash" of May 6, 2010, the stock market has shown manic-depressive behavior, going back and forth from euphoria to depression on the slightest bit of news. It's been hard to make money by going either long or short, but the strategy of selling Covered Calls does both at the same time. So visit the VectorVest University to see Mr. Glenn Tompkins, Manager of Educational Services, illustrate how it is done in this week's rewarding "Strategy of the Week" presentation, "Taming the Tiger with Covered Calls."

THE $1000.00 AWARD CHALLENGE.
We believe we have a winner, but we need more time to check the results. If it pans out the way we think it will, we will give you the details next week.

Last week I touched upon the subject of the Holy Grail of stock trading with the idea of developing a trading system that consistently produces good results over the long term. As noted in last week's essay, one of the first steps in developing such a system is that of finding a Strategy, i.e., a search, which consistently returns winning stocks. VectorVest has several tools to help us find the best Strategies, and I have been writing lately about our newest tools: the VectorVest RealTime Derby, the Tote Board and the Efficiency Factor.

The VectorVest RealTime Derby tracks and displays the daily performance of 185 10-stock portfolios, tick-by-tick, from the opening bell to the market's close. The data from each day's performance is stored in a Derby Tote Board which allows us to study the cumulative performance of the portfolios created from each Strategy over any selected time period. The Efficiency Factor reflects the Percent Winning Days, the Percent Winning Trades and Maximum Drawdown Percentage for each portfolio. As we have seen, the Derby provides data which allows us to identify the best performing Strategies with a minimum of effort. Basically, it measures performance day-by-day. The Tote Board accumulates the daily performance data and allows us to track the performance of all 185 Strategies for any time period since August 18, 2009.

Two weeks ago, we showed that the best performing Bullish Strategies, five days from a bottom, generally continued to perform well throughout the entire duration of a rally. (Visit the VectorVest University to see the SOTW of 07/30/10.) The efficacy of the technique demonstrated on 07/30/10 was verified in last week's SOTW, which covered several campaigns. Now I intend to examine the efficacy of using the Strategies which have been identified by the Derby to have the best performance over a long time period, i.e., 249 trading days.

The five best performing 249-Day Strategies, as of yesterday's close are as follows.

Name	Total % G/L	Efficiency Factor
Bottom Fishing in Rising Industries	104.99	24.81
El Cheapo Cheapos	97.71	13.25
Thornton's Thunder	89.39	15.44
VST Mighty Mites	85.50	24.48
Explosive EPS Stocks II	80.26	12.89

Bottom Fishing in Rising Industries had 59% Winning Days and 50% Winning Trades with a Max Drawdown of 16.41%. Coupled with a 104.99% gain, it's pretty incredible. This Strategy finds low-priced stocks ranked by VST/RT in Industry Groups with the highest one-day Price Delta. So it does what the name implies, but can we use it to make big profits?

We tried to find out. I back-tested it from August 17, 2009 to yesterday's close in Portfolio Manager using several different exit criterion and the best I could do was a gain of slightly above 40%. Glenn Tompkins worked it over with the Simulator and maxed-out with an 80% gain. But he had to make over a thousand trades to do it. That's insane. What we need is a practical, feasible trading system for capturing the profit potential of this great Strategy. The first one who sends such a system into us will get a $1,000.00 Award.

P.S. If an acceptable trading system is sent in, we will use it to test the VST Mighty Mites Strategy. If it works there too, we'll give you a $500.00 bonus.

THE WHITE FLAG.
We were thinking about presenting a Bearish "Strategy of the Week" presentation this week, but the best performing Strategy today was Bullish. Yes, the next best performer was Bearish and the next best was also Bearish. And so it goes. This market is a mixed up mess. So we're suggesting that you raise Cash. Visit the VectorVest University to see Mr. Glenn Tompkins thrilling "Strategy of the Week" presentation, "The White Flag."

The Holy Grail of stock trading is a fully developed system of trading stocks which consistently produces high returns with tolerable draw-downs. While I have never claimed to be looking for the Holy Grail, I have written about virtually every aspect of trading system development, and, in fact, we teach the subject in our Technical Analysis Course.

As I recall, the first steps in developing a successful trading system lie in knowing when to go long and when to go short and finding the best Strategy to use for finding the right stocks. Money management rules are then applied to reduce risk and optimize performance.

Traditionally, we have used our Market Timing System to know when to go long or short and the UniSearch Tool along with QuickTest to find the most promising Strategies to use. The Back-Testing features of Portfolio Manager are then used to reduce risk and optimize performance. The Simulator performs all of these tasks automatically and is the ultimate tool for trading system development.

The VectorVest RealTime Derby, however, adds a new dimension to the process. It tracks and displays the daily performance of 185 10-stock portfolios, tick-by-tick, from the opening bell to the market's close. The data from each day's performance is stored in a Derby Tote Board which allows us to study the cumulative performance of each portfolio over any selected time period.

Observation of the top five performing portfolios for the five-day periods provides a market timing system unto itself. For example, the market is bullish when all five portfolios are derived from Bullish Strategies. It is bearish when all five portfolios are derived from Bearish Strategies. It is in transition when they are mixed. These observations do not conflict with the information given by the Color Guard, but complement it.

The Tote Board performance data also complements the work done by the QuickTest tool. While the Tote Board sums the daily performance of the 10-stock portfolios created each day, QuickTest displays the performance of a single l0-stock portfolio from the day it was created to the end of the time span. Therefore, the results are different. Which data set is a better indicator of future performance?

Hopefully, you watched last week's "Strategy of the Week" presentation. It showed that going long on July 12th with a Strategy selected from the Tote Board's list of 5-day top performing portfolios produced wonderful results. What would the sequence of five QuickTests from the close of July 2nd to the close of July 12th have told me? (This sequence of QuickTests was run on the Simulator and is called "Quick Sims.") Here are the results:

Tote Board	Quick Sims
Jail Break - No Contra ETFs - 16.56%	S&P600 Small Cap/RT - 14.71%
S&P600 Small Cap/RT - 15.56%	Silber's Singles/BMB - 10.13%
Blyar's Bottom Feeders/BMB - 15.22%	Pirates Long - 10.08%
Russell 2000/RT - 14.83%	Odd Fellows Long - 9.41%
Bottoms Up - 13.49%	S&P100/RT - 9.31%
Silber's Singles/BMB - 11.82%	Bottoms Up - 9.26%
Jubilee - 10.95%	Blyar's Bottom Feeders/BMB - 8.65%
VST Mighty Mites - 10.89%	Jail Break - No Contra ETFs - 8.55%
Odd Fellows Long - 10.46%	Jubilee - 8.08%
Pirates Long - 9.63%	S&P500/RT - 7.93%

My first observation is that eight of the top 10 Tote Board Strategies also made the top 10 of the Quick Sims list. However, the S&P600 Small Cap/RT Strategy was the only one ranked in the top five performers of both lists. Since July 12th, it is the second biggest gainer in the Tote Board with 17.37% as of yesterday. Quick Test also showed a nice gain of 12.11%.

Jail Break - No Contra ETFs, the biggest 5-day winner ala the Tote Board, came in fourth place with a Tote Board gain of 15.69% since July 12th and a gain of 6.85% ala QuickTest. Finally, Silber's Singles/BMB, the second highest stock ala QuickTest, showed a gain of 6.18% since July 12th ala the Tote Board and -0.48% ala QuickTest.

So which is the better indicator of future performance? That's hard to say with so little data, but I'm leaning toward the Tote Board. However, I haven't taken efficiency into account in this comparison and it could be The Difference Maker.

EFFICIENT PERFORMERS - PART II.
Jerry D'Ambrosio dazzled us with his presentation last week, so we decided to explore it a little further. Let's see what Mr. Todd Shaffer can do with the technique Jerry described. Visit the VectorVest University to see this week's "Strategy of the Week" presentation: "Efficient Performers - Part II."