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."

This market is starting to remind me of late 2008, early 2009. The VIX is high and our Market Timing Indicators are low. But we're not near the sorry state that existed back then by a long shot. For example, the VIX hit an incredible high of $80.86 on November 20, 2008 and it hit a high of "only" $45.79 on May 20, 2010 when the Mighty Dow dropped 376 points.

But we know from long experience that when the Buy/Sell Ratio, BSR, goes below 0.20, the market is drastically oversold and it's time to be looking for an explosive rebound in stock prices. Indeed, the BSR closed at 0.12 on May 20th and the market rebounded to the extent that the Color Guard signaled a green light in the Price column on June 3rd. Admittedly, this rebound was only a teeny bounce compared to the 30-day rally which followed the November 20, 2008 selloff, but it has significance in that it failed to develop into a sustainable upturn as did the November 2008 rally. In both cases, the market moved to lower lows. In 2009, the final low occurred on March 9, 2009 and in the current instance, the Price of the VectorVest Composite hit an intraday low of $22.69 per share on Tuesday, June 8th. Will this be the ultimate low for this downturn?

It could be, but don't bet the farm. The good news is that the June 8th intraday low of $22.69 was two cents higher than the previous intraday low of $22.67 hit on May 25th. The bad news is that the BSR closed at 0.13 on May 25th and 0.11 on June 8th. I would have liked to seen it close above 0.13, but there's still more good news. The market has hit higher intraday highs and higher intraday lows each day since Tuesday, June 8th.

The best news is that the Futures took a real shot this morning due to a poor Retail Sales report, but recovered quickly on a better-than-expected Consumer Sentiment report. This shows that bargain hunters are alive and well. But they aren't as greedy as they should be. Upside volume has been weak and leads me to label the June 8th low as a Tentative Bottom.

TAMING THE TIGER WITH BEAR CALL CREDIT SPREADS.
Due to the extreme volatility we were experiencing in late 2008, we made a series of presentations with the theme of "Taming the Tiger," i.e., coping with volatility. The way to do this, we said, was to execute low-risk trades by hedging your bets. On 12/05/08, for example, we illustrated how to protect yourself by hedging your short stock positions by buying out-of-the-money Call Options. We then followed up with more presentations incorporating this theme. Now is the time to re-visit this low risk approach to making money. To see how it's done, visit the VectorVest University to see Mr. Glenn Tompkins, who, incidentally gave our first Taming the Tiger presentation, give this week's outstanding "Strategy of the Week" presentation, "Taming the Tiger with Bear Call Credit Spreads."

CNBC has made a living by asking controversial questions; then lining up so called experts with opposing views to debate the answers. More often than not, this little game gives off more heat than light. Take today's question, "Where is the market headed, Dow 9,000 or 11,000?," for example. It was inspired by a guest who appeared yesterday and said the market is going to go down, and the Dow is going to plunge to 5,000. Well, this is pretty scary stuff, so why not milk it?

Now guessing the market's direction is very interesting stuff, so I listened closely as Ms. Erin Burnett, Co-Anchor of Squawk on the Street, asked two guest money managers if the Dow could possibly fall to 5,000. The first expert said, "Of course, anything is possible, but he wasn't in the 5,000 camp." Nevertheless, he would not commit to where the Dow is headed. The second expert babbled something to the effect that his firm wasn't interested in short-term volatility and that investors should be using a 20-year time horizon to assess the market. He was implying, of course, that the market always goes higher over a 20-year time span. When Ms. Burnett pointed out to him, however, that the NASDAQ is still down 50% from its March 2000 high, he went off on another incomprehensible tangent. So where is the market heading?

I don't know, of course, but I do believe that Europe's bailout package which triggered Monday's explosive rally did not solve any problems. Moreover, it's naive to believe that the cause of May 6th's "Flash Crash" is unknown. Given these beliefs I am biased to the side of caution. Moreover, my old friend, who I wrote about last week and have come to trust and depend upon, is still in the C/Dn mode and is telling me that this week's bounce in stock prices is about to be toast. With the tools I have available with VectorVest, I really don't need to watch CNBC's Guessing Game.

A CALL TO USE COVERED CALLS.
As we continue to teach the Retirement Seminar, I have become more convinced that knowing how to sell Covered Calls is an essential part of insuring that you will meet your retirement goals and objectives. I didn't always look at selling Covered Calls this way. Years ago, I used to think it was just a good way to reduce risk and still achieve very acceptable rates of return. Now I see it as a sure-fire way of generating a steady stream of income. I have written many essays about Covered Calls over the years and we have made numerous "Strategy of the Week" presentations on the subject.

This week, Mr. Glenn Tompkins, Manager of Educational Services, will collect, organize and bring all this information together for us so that we may learn from it and enhance our investment performance. So join Mr. Tompkins at the VectorVest University to learn how you can reduce risk and generate considerable cash by answering "A Call to Use Covered Calls."

You might say it's just dumb luck, but our Market Timing System has had us playing defense or the downside of the market on every major downturn since VectorVest was created. But it isn't dumb luck...it's the way our Market Timing System is designed.

Take the current downturn, for example. There was no way to predict what happened yesterday, but that doesn't matter. What matters is that our Market Timing System informed us that the market was moving lower and we advised you well in advance of yesterday's historic events not to buy stocks and to play the market with a bias to the downside. This guidance wasn't dumb luck. It was based upon factual, objective analysis.

On Monday, May 3rd, the market rallied sharply. The Primary Wave, i.e., the week-over-week trend of the Price of the VectorVest Composite, however, remained in a Dn mode. So our guidance remained the same as it had been on Friday, April 30th: Prudent Investors should not to buy stocks and Aggressive Investors and Traders should play the market with a bias to the downside.

On Tuesday, May 4th, the market dropped sharply and a Red Light appeared in the Price column of the Color Guard. So we strengthened our guidance that evening by removing the words, "with a bias," and said, "Aggressive Investors and Traders should play the market to the downside." We also went into Cash in the "Riding-the-Wave" portfolio and said we would go short if the market continued to move lower.

On Wednesday, May 5th, we went short in the Riding-the-Wave portfolio and we had our Stops in place in our other portfolios. So yesterday's market collapse allowed the RTW portfolio to make money and caused limited damage in the other portfolios.

We've been through a lot of rough down days in the 22 years we've been in business and we have survived them all. Much of the credit goes to our Market Timing System. But no Market Timing System can predict an unexpected, catastrophic event such as a terrorist attack. We were lucky to be playing the market to the downside when 9/11 occurred and that's why techniques, such as using Stop Prices, selling Covered Calls, buying Put Options or simply trimming investment exposure are also used to reduce portfolio risk. But the most important thing to do, is know market direction.

Our Market Timing System has been telling us whether the market is rising or falling for many years, and it will continue to do so. I have come to trust it and depend upon it...like An Old Friend.