The wick is lit and time is ticking away. Mr. Jim Chanos, a noted short-seller who blew the whistle on Enron, Tyco and other companies ready to implode, says the UK housing market is where the U.S. was 18 months ago. He may be too optimistic.

The Wednesday, November 28th, Daily Mail says that 10 million Britons are falling into a black hole of debt. Debt-laden Brits owe some 1.3 billion pounds to banks and finance companies and 53% spend more than half of their take home pay in debt payments. 5.4 million Brits, 12%, have missed payments on debts and bills in the last 12 months. Three percent fear they are about to lose their homes. Five interest rate hikes since August 2006 have added more than 100 million pounds per month to repayments on the majority of mortgages.

In terms of population, the housing bubble in the U.S. is small at one fifth of the size of The Housing Bubble: British Style.

THE ENHANCED PROTRADER MARKET TIMING SETUP.
In last week's essay, I used the Standard Market Timing Graph to illustrate how it could be used to call a market bottom. That was a great call, but it wasn't the only way to skin a bear. That's why I also use an enhanced version of the ProTrader Market Timing Graph.

The ProTrader Market Timing Graph allows one to study market timing from another perspective, and many of our subscribers say it is better than the Standard Market Timing Graph. I'm not sure I agree with that, but I know that I have made it better than the one described in my essay of August 20, 2004. I simply added the 9, 12, 26 MACD to the default ProTrader Market Timing Graph.

This indicator allows me to get a better feel for market momentum. It's like watching the BSR with the Standard Graph. For example, MACD crossovers on a 6-month, daily ProTrader graph clearly showed a momentum swing from Up to Dn on July 23rd, the first trading day after I wrote the snippet, "Beware the July High." You will also see other critical crossovers on August 21st from Dn to Up, October 16th from Up to Dn and now, November 29th from Dn to Up.

To see the ProTrader Market Timing Graph, simply access the Standard Market Timing Graph; then click on ProTrader Graph. If you do not have ProTrader on your computer, you may visit our website to sign up for a Free 2-week Trial. While it's not absolutely necessary to have ProTrader, I love The Enhanced ProTrader Market Timing Setup.

In Wednesday's Strategy section, we said "While the MTI and RT matched their August 16th lows, the BSR still has not done so by closing at 0.15 versus 0.10 on August 16th and the Price of the VVC has also not matched the August 16th low. Therefore, there still may be some room to move to the downside, but the market is terribly oversold, making an explosive rebound possible. Bottom line, it's too late to sell short." What does all this mean?

First of all, the Price of the VectorVest Composite, VVC, is the primary indicator we use to track the market's movements. When the Price of the VVC goes up, the average Price of over 8,300 stocks in our database has gone up; when it goes down, it's safe to conclude that the market has gone down. A graph depicting the daily closing Prices of the VectorVest Composite may be obtained by clicking on the header labeled, "Market Timing Indicator" shown on the Home Page. This graph, called "Market Timing Graph," also shows a 40-Day, simple moving average of Price in the upper section and the Market Timing Indicator, MTI, in the lower portion.

The Market Timing Graph clearly shows that the Price of the VVC peaked most recently on 10/12/07. Note that on that day the MTI peaked at a level of 1.63. If one sets the dateline on the graph to 10/10/07, they would see that the MTI hit 1.63 even though the Price of the VVC was lower than it was on 10/12/07. In other words the MTI did not confirm the up move of the Price of the VVC from 10/10/07 to 10/12/07. This divergence gave an early warning signal that there was trouble ahead. The 5-Year Daily Market Timing Graph shows that the MTI also gives an early signal that the market is nearing a bottom of a downturn when it hits or goes below 0.60. This is exactly what happened on Wednesday, 11/21/07, when the MTI hit a remarkable low of 0.52.

Now let's replace the MTI on the graph with RT. Note that in the most recent upturn RT peaked on 10/05/07, five trading days before the Price peaked on 10/12/07. This behavior is not unusual. In the prior rally, which went from 03/05/07 to 07/13/07, RT peaked 29 days before the Price of the VVC peaked. This divergence marked the end of the "blast-off" phase of that rally. In regard to downturns, the 5-Year Market Timing Graph shows that the market is nearing the end of a downturn when RT nears or goes below 0.83. It hit 0.81 last Wednesday.

The Buy/Sell Ratio, BSR, is by far the most revealing of the four indicators. The 1-Year Daily graph shows that the BSR peaked on 10/09/07, three trading days before the Price of the VVC peaked, but two days after RT peaked. It is interesting to note that both MTI and RT reached their former peaks of 10/12/07, the day the Price of VVC peaked, but the BSR never did. It moved up a bit, but stayed well below its 10/09/07 peak. So it clearly marked the end of the "blast-off" phase of the 08/16/07 to 10/12/07 rally. The BSR also gave an early warning of trouble ahead as described in my essay of 10/19/07, called "The Canary's Warning." The All-Daily display of the Market Timing Graph shows that the BSR does an excellent job of signaling the bottoms of downturns. In particular, it is time to stop selling short and to begin getting your shopping list ready when the BSR goes below 0.20. Yes, the market can go lower after this event, but you would be playing with fire to continue shorting stocks.

In the current downturn, the MTI led the way down. It hit 0.60 on 11/16/07. The BSR hit 0.19 on 11/19/07 and the RT finally hit 0.81 on 11/21/07. The fact that the MTI and RT matched or went below their August 16th lows last Wednesday while the BSR did not, is fascinating to me. It suggests the possibility that, perhaps, the massive sell-offs are subsiding and stock prices are consolidating for a nice rally. We will get more evidence of this if stock prices go lower but the BSR refuses to go below the 0.15 level hit last Wednesday.

Now I know all of this may sound very complicated to some of you, but just relax. The Color Guard will tell us in the blink of an eye that the downturn has lost its energy when the first green light appears after all those red and yellows. Then it's time to cover your short positions and start going long. Moreover, Mr. John Campbell will walk us through a fascinating interpretation of the Market Timing Graph in this week's "Strategy of the Week" presentation. So visit the VectorVest University at www.vectorvest.com and watch John's presentation on "Calling a Bottom (Updated)."

Are we going into a recession? I was asked that question over and over again at last week's AAII Investor's Conference. On several occasions, I have said that when the Fed lowers interest rates, it's already too late to prevent a recession. Will I be right?

As I recall, the Fed has managed to have a "soft landing" only twice in the last ten economic downturns. The most recent instance was in 1995, when Dr. Greenspan managed that remarkable feat. It was the only one he had in 20 years in office, so the chances of Dr. Bernanke wiggling his way to a soft landing so soon in his career has to be pretty slim. In fact, it has been my observation that the Fed tends to raise interest rates too high and cause recessions, not prevent them.

In my essay of April 13, 2006, I said that it would be a problem if the Fed Funds rate went above 5%. Indeed, the Fed raised it to 5.00% a month later; then increased it again to 5.25% in June. This was done even though Dr. Bernanke had previously told Congress in April that the Fed might pause in its series of rate hikes to await further data. In my view, the move to 5.25% was unnecessary and was the classic step too far.

Now the Fed is in the process of lowering the Fed Funds rate. They lowered it to 4.75% on September 18th and again to 4.5% on October 31st. The first move sent stock prices flying, while the second did not because the Fed said it felt that the risks of inflation and the downside risks of a slower economy were roughly in balance. This statement signaled that there probably wouldn't be any further rate cuts soon. Disappointed, investors sent stock prices lower and we got a C/Dn signal the next day, November 1st.

So where are we now? Recession talk has been increasing lately and I read more and more about it each day. But there are some who say a recession is not likely. Mr. David Joy of Riversource Investments appeared on Bloomberg this morning and said that Wall Street talk of a recession is overblown. He said the housing market affects only 4.3% of the economy so its problems aren't big enough to sink the economy all alone. He did admit, however, that credit constraints could cause a recession. On the other hand, Mr. James C. Cooper, BusinessWeek Senior Editor, writes in the November 10, 2007 edition that the economy has "Tipped Toward Recession," and he explains why in very clear terms. I have read his articles for many years now and he knows what he's talking about.

So is it too late for the Fed to prevent a recession? Truth be known, we will know if it's too late only when It's Too Late.

Several weeks ago, a subscriber suggested that we revise our Energy (Coal/Other) Industry Group listing for Energy (Other) by separating "the solar/clean energy stocks into their own group." He said it was a bit ironic to have the clean (solar) grouped with the dirty (coal). He also said the solar group has stunning growth potential going forward. Of course he was right. So we reorganized the Energy Business Sector into two Industry Groups: Energy (Clean) and Energy (Coal).

An examination of the dataset for each of these new groups is very interesting. There are 56 stocks in the Energy (Clean) group while the Energy (Coal) group contains only 26 stocks. Only 19 of the 56 stocks in the Energy (Clean) group have EPS values above 0.00, while 17 of the 26 stocks in the Energy (Coal) group are forecasted to make money over the next 12 months. Not surprisingly, the average RV for the Energy (Clean) group is 0.69 and that of the Energy (Coal) group is 1.08. Both groups have average RS values below 1.00.

With so many money losers in the Energy(Clean) group, its average GRT is a deceptive 11 %/yr. Don't let that fool you, there are a dozen blazers in this group with GRTs above 30 %/yr. There is only one blazer in the Energy (Coal) group and that's Massey Energy, MEE. Finally, the average annual sales of the stocks in the Energy (Clean) group is only $174 million compared to $1.303 billion for the Energy (Coal) group.

I also found it interesting to look at the graphs of both of these new Industry Groups. The All-Weekly graph of the Energy (Clean) Industry Group shows all the earmarks of new technology stocks. Its Price skyrocketed in early 2000, as so many other speculative stocks did, only to crash in the subsequent bear market. Since April 2003, however, it has gone up in Price more or less steadily even though these stocks have been persistently overvalued. Currently the group is moving swiftly higher with an RTRanking of 29.

The long-term graph of the Energy (Coal) group shows that it actually went down in Price from mid-1995 to April 2000. It spiked higher in 2001; then moved lower into October 2002. Higher oil prices helped this group of stocks move up with the great bull market of the last five years, but its Price peaked in September 2005 when its average forecasted earnings began to move lower. Although the average forecasted earnings of this group is still in a downtrend, it too is in rally mode.

Obviously, the relentless rise in oil prices is behind the investment potential of the stocks in each of these Industry Groups. While I would not reject the dirty old coal stocks out-of-hand, the excitement is really in the clean energy stocks. Only yesterday for example, First Solar Inc., FSLR, soared over $57/share. Additionally, JA Solar Hldgs, JASO, and SunPower Corp., SPWR, rank among the top VST stocks in Stock Viewer.

As a final point, I suggest that you not limit your attention only to solar stocks. A wide range of other technologies, such as fuel cells, biofuels, wind power and ocean power, are also represented among the clean energy stocks. As I write this essay, I'm thinking we should create another Industry Group for uranium stocks which are located in the Mining (Other) Industry Group in order to complete our separation of Strange Bedfellows.