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The Daily Color Guard
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An Enhanced System of Timing the Market
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by
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Dr. Bart A. DiLiddo
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The Daily Color Guard is intended to accurately describe the direction and strength of the stock market on a day-to-day basis. In this regard, it provides an enhanced system of timing the market. It is the successor to the "Color Guard" system of timing the market which was introduced to VectorVest users on December 18, 1998. Prior to that, we had been using the basic system of timing the market described in Chapter 20 of my book "Stocks, Strategies & Common Sense."
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| Although we had very good success in timing the market with our basic system, the Color Guard was aimed to make it better. Indeed, the Color Guard was an instant success. But it provided only a week-to-week analysis of the market, and our readers wanted daily updates of the market. Therefore, the "Daily Color Guard" was introduced on March 5, 1999. While it was another step forward, it required the application of additional rules to interpret the market's behavior. The purpose of this report is to document and update these rules. |
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Our basic system of timing the market is described in Chapter 20 of my book, "Stocks, Strategies & Common Sense." It involves two simple rules:
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(1) If the Price of the VectorVest Composite, (PVVC), moves in a given direction for two weeks, it gives a preliminary signal of a sustainable trend in that direction, and
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(2) An upturn is confirmed when the ratio of Buys to Sells, (BSR), in our Recommendation Profile goes above 1.00, and a downturn is confirmed when the BSR goes below 1.00.
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| While the application of these rules served very well over the years, they did not utilize all the information provided by these indicators. For example: |
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| Rule (1) uses the PVVC's movements to signal the market's primary direction, but it does not take advantage of the information regarding the strength of the market's movements. |
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| Rule (2) uses the BSR to measure the underlying strength of the market, but it does not analyze changes in the BSR to reveal the direction of the market's movements. |
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| Finally, neither of the above rules uses the PVVC's Relative Timing indicator, (RT), which provides information on the established direction, momentum and strength of the market. |
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| The Color Guard system is designed to reflect the overall direction and strength of the market. This is done by denoting color changes in each of the three indicators cited above, and by creating a composite indicator called the "Market Timing Indicator." Here's how its done: |
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| A. THE COLOR CODE: |
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| I. The Price of the VVC |
- a) Green. The Price of the VVC will be coded green when it moves up one week on any given day and it has also moved up from the prior day.
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- b) Yellow. The Price of the VVC will be yellow when it falls one week from a green condition, rises one week from a red condition, or when its week-to-week change is not consistent with its day-to-day change.
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- c) Red. The Price of the VVC will be red when it falls one week on any given day and it has also moved down from the prior day.
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| II. The RT of the VVC |
- a) Green. The RT of the VVC will be coded green when it increases from a green or yellow condition and is >= 1.00, or when it increases from below 1.00 to above 1.00.
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- b) Yellow. The RT of the VVC will be coded yellow when it decreases from a green or yellow condition and remains above 1.00, or rises from a red or yellow condition and remains below 1.00.
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- c) Red. The RT of the V V C will be coded red when it decreases from a yellow or red condition and is <= 1.00, or decreases from above 1.00 to below 1.00.
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| III. The Buy/Sell Ratio of the Recommendation Profile (BSR) |
- a) The color coding scheme for the BSR is exactly the same as that shown above for the RT of the VVC.
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| B. COLOR COMBINATIONS: |
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| I. All Lights are Green |
| This is a very Bullish signal which occurs when the PVVC is in a confirmed uptrend, the BSR is above 1.00, and the RT of the VVC is also above 1.00. |
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| When this condition exists, it's OK to buy stocks. Prudent Investors should go bottom-fishing, bargain hunting, and buy high VST-Vector, "B" rated stocks. Aggressive Investors would buy naked Call options and sell Put options on rapidly rising stocks and/or indexes. |
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| II. The Caution Light is On |
| This is an intermediate signal comprised of any combination of green, yellow and red colors. It occurs when the market is in a transitional phase or falters in an upward or downward trend. It may be biased, however, from somewhat Bullish (Green/Yellow) to somewhat Bearish (Red/Yellow). |
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| In the somewhat Bullish situation during an upturn, Prudent Investors would continue to buy stocks, and Aggressive Investors would continue to play the upside of the market while being aware that the upturn may be fading in strength. |
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| In a Neutral (all Yellow) condition during an upturn, Prudent Investors would defer opening new positions, and consider protecting profits. Aggressive Investors would play the market on a day-to-day basis as it develops. |
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| In the somewhat Bearish (Red/Yellow) condition during an upturn, Prudent Investors would begin to reduce long positions and protect profits. Aggressive Investors would move out of long positions and switch to favoring downside strategies. However, they would remain alert to the possibility of contrary moves. |
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| III. All Lights are Red |
| This is a Bearish signal. It occurs when the PVVC has gone down at least one week, and all other indicators are below 1.00. In this situation, Prudent Investors would not buy any stocks. They would take profits and buy Put options. Aggressive Investors would sell stocks short, and buy Put options. |
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| Please note that "All Lights are Red" does not necessarily mean that a Bear market is underway. In my book I explain, a Bear market occurs only when the market is overvalued and inflation and interest rates are rising. |
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| C. THE MARKET TIMING INDICATOR: |
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| The Market Timing Indicator, (MTI), is designed to measure the overall strength and direction of the market. It combines the PVVC, the RT, and the BSR into a single indicator which ranges from 0.00 to 2.00. The underlying trend of the market is up when the MTI is above 1.00, and down when the MTI is below 1.00. The strength of a trend is, of course, reflected by the level of the MTI. |
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| D. MARKET TREND ANALYSIS: |
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| It is important to recognize that each of the indicators cited above serve a specific purpose. These are described as follows: |
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| 1. The Price of the V V C, (PVVC), is the PRIMARY indicator of the market's direction and strength. If it moves up or down for a single week, it sends an alert that the market is beginning to move in that direction. If it moves two consecutive weeks in a given direction, it gives a preliminary signal of a sustainable trend. The stronger the move(s), the more likely it is for the new trend to continue. |
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| 2. The Relative Timing of the V V C, (RT), reflects the direction, strength and momentum of an established market trend. This indicator is especially useful in analyzing the momentum of a trend. If it diverges from a move in the PVVC, it signals a change in momentum. |
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| 3. The Buy/Sell ratio of the VectorVest Composite, (BSR) reflects the strength of the market. It lags the moves of the Price of the V V C, and, therefore, is useful in confirming trends signaled by the PVVC.
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| 4. The Market Timing Indicator, (MTI), combines the PVVC, the RT and the BSR into a single indicator. It reflects the UNDERLYING trend of the market. The market is trending upward when the MTI is above 1.00, and trending downward when MTI is below 1.00. |
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| E. MARKET TREND REPORTS: |
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| Both the PRIMARY and UNDERLYING trends are used in reporting what the market is doing. This is done as follows: |
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| 1. An "UpUp" report means that the PVVC has moved "Up" on a week-to-week basis, and the underlying trend of the market is "Up" because the MTI is above 1.00. |
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| 2. A "DnUp" report means that the PVVC has moved "Dn" (Down) on a week-to-week basis, but the underlying trend of the market is still "Up." |
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| 3. An "UpDn" report means that the PVVC has moved "Up" on a week-to-week basis, but the underlying trend of the market is "Dn" (Down) because the MTI is below 1.00. |
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| 4. A "DnDn" report means that the PVVC has moved "Dn" (Down) on a week-to-week basis, and the underlying trend of the market is "Dn." |
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| 5. A "C/Up" means "Confirmed Up." This happens when the PVVC has moved up for at least two weeks, with a confirming move up from the previous day and the BSR has gone from below one to above 1.00. |
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| 6. A "C/Dn" means "Confirmed Down." This happens when the PVVC has moved down for at least two weeks, with a confirming move down from the previous day and the BSR has gone from above 1.00 to below 1.00. |
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| F. COLOR GUARD COMMENTARY: |
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| The daily commentary regarding the Color Guard report is shown in the "Timing" section of VectorVest Views. The commentary is intended to be self explanatory, and adheres to the rules cited above. An example of the Daily Color Guard commentary is shown below: |
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| The Daily Color Guard Analysis |
| Thursday, May 18, 2006 |
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| ANALYSIS: The Price of our VectorVest Composite (VVC) closed at $26.17 per share today, down $0.17 per share from yesterday and down $1.19 per share from last Thursday's price of $27.36 per share. Since the Price of the VVC fell from last week and was confirmed by today's action, it remained red as compared to last Thursday. The primary trend of the market, which is determined by the week-to-week direction of the Price of the VVC, is Dn. |
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| The RT of the VVC closed at 0.90, down 0.01 point from yesterday and down 0.10 points from last Thursday's reading of 1.00. Since this indicator fell from last week and was confirmed by today's action, it turned red as compared to last Thursday's yellow. |
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| The Buy/Sell Ratio, (BSR) of our Recommendation Profile of 8,053 stocks closed at 0.30, down 0.06 points from yesterday and down 0.76 points from last Thursday's reading of 1.06. Since this indicator also fell from last week and was confirmed by today's action, it too turned red as compared to last Thursday's yellow. |
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| Our Market Timing Indicator, (MTI), which combines the trends of the Price of the VVC, the RT and the BSR into a single indicator, closed at 0.64, down 0.06 points from yesterday and down 0.54 points from last Thursday. Since it is below 1.00, the underlying trend of the market is Dn. |
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| SUMMARY: With three red lights, the Color Guard is Bearish. With the Price of the VVC moving lower for two consecutive weeks and the BSR below 1.00, we have a C/Dn situation. |
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| STRATEGY: A nascent rebound was rebuffed by later afternoon selling today sending stock prices lower. With the Price of the VVC going down for the second consecutive week and the BSR below 1.00, we have now received a Confirmed Down signal. Prudent Investors should not buy any stocks at this time and/or protect profits. Aggressive Investors and Traders should continue to play to the downside. For those of you who are "Riding the Wave," we are short with selections from "Sector Peak - Short" which is located in Strategies - Speculative. |
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| You may see all the action of the Daily Color Guard graphically by clicking Market Timing Graph on the Charts & Graphs Quick Lookup Menu on the Home Page. |
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| G. USING THE COLOR GUARD SYSTEM: |
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| The Color Guard provides us with a powerful tool for profiting from the up and down movements of the market, and is best used in conjunction with the Market Timing Graph. The table below shows the dates and data for the VectorVest Confirmed Calls. |
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VectorVest Confirmed Calls
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1996 - 2007
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Date
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VVC
Price
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VVC
RT
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%
Buys
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%
Sells
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B/S
Ratio
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CG
Price
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CG
Rt
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CG BHS
Ratio
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MTI
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Trend
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| 02/02/1996 |
21.5 |
1.03 |
23.8 |
21.6 |
1.10 |
G
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G
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G
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1.17 |
C/Up |
| 03/08/1996 |
21.3 |
0.96 |
14.8 |
28.3 |
0.52 |
R
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R
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R
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0.80 |
C/Dn |
| 03/22/1996 |
21.7 |
1.03 |
23.2 |
20.3 |
1.14 |
G
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G
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G
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1.07 |
C/Up |
| 06/21/1996 |
21.4 |
0.95 |
12.9 |
22.9 |
0.56 |
R
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R
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R
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0.72 |
C/Dn |
| 09/13/1996 |
20.7 |
0.98 |
24.1 |
23.7 |
1.02 |
G
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Y
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G
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1.15 |
C/Up |
| 10/25/1996 |
20.8 |
0.94 |
16.6 |
25.3 |
0.66
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R
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R
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R
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0.82 |
C/Dn |
| 1/10/1997 |
21.5 |
1.02 |
24.6 |
17.0 |
1.45 |
G
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G
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G
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1.21 |
C/Up |
| 02/28/1997 |
21.2 |
0.93 |
15.6 |
28.6 |
0.55 |
R
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R
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R
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0.77 |
C/Dn |
| 05/16/1997 |
20.9 |
0.97 |
21.2 |
21.2 |
1.00 |
G
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Y
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G
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1.02 |
C/Up |
| 10/31/1997 |
22.7 |
0.94 |
11.4 |
30.3 |
0.38 |
R
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R
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R
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0.65 |
C/Dn |
| 02/06/1998 |
22.3 |
1.01 |
30.6 |
23.7 |
1.29 |
G
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G
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G
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1.31 |
C/Up |
| 05/15/1998 |
23.1 |
1.00 |
17.8 |
22.2 |
0.80 |
R
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Y
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R
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0.90 |
C/Dn |
| 10/23/1998 |
17.4 |
1.02 |
31.2 |
29.1 |
1.07 |
G
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G
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G
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1.29 |
C/Up |
| 01/22/1999 |
19.5 |
1.04 |
24.9 |
27.9 |
0.89 |
R
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Y
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R
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0.93 |
C/Dn |
| 04/23/1999 |
19.66 |
1.04 |
31.6 |
31.5 |
1.00 |
G
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G
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G
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1.14 |
C/Up |
| 07/26/1999 |
20.04 |
0.99 |
22.1 |
31.2 |
0.71 |
R
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R
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R
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0.76 |
C/Dn |
| 11/18/1999 |
21.24 |
1.06 |
26.7 |
26.3 |
1.02 |
G
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G
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G
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1.49 |
C/Up |
| 03/20/2000 |
24.61 |
1.07 |
29.6 |
32.8 |
0.90 |
R
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Y
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Y
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0.70 |
C/Dn |
| 07/13/2000 |
22.99 |
1.06 |
30.7 |
29.4 |
1.04 |
G
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G
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Y
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1.57 |
C/Up |
| 07/28/2000 |
21.15 |
0.89 |
19.1 |
43.1 |
0.44 |
R
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R
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R
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0.94 |
C/Dn |
| 09/01/2000 |
23.21 |
1.05 |
31.0 |
28.8 |
1.08 |
G
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G
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G
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1.26 |
C/Up |
| 09/15/2000 |
22.44 |
1.00 |
27.1 |
32.4 |
0.84 |
R
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Y
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R
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0.97 |
C/Dn |
| 01/18/2001 |
19.57 |
1.04 |
34.2 |
23.8 |
1.43 |
G
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G
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G
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1.26 |
C/Up |
| 02/23/2001 |
18.44 |
0.94 |
24.4 |
30.1 |
0.81 |
R
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R
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R
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0.76 |
C/Dn |
| 04/30/2001 |
18.43 |
0.98 |
26.1 |
24.1 |
1.08 |
G
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Y
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G
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1.25 |
C/Up |
| 06/25/2001 |
18.32 |
1.01 |
25.1 |
25.3 |
0.99 |
R
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Y
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R
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0.87 |
C/Dn |
| 11/13/2001 |
16.84 |
1.04 |
25.7 |
22.5 |
1.14 |
G
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G
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G
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1.35 |
C/Up |
| 02/06/2002 |
17.08 |
0.94 |
16.6 |
28.0 |
0.59 |
R
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R
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R
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0.81 |
C/Dn |
| 03/06/2002 |
18.16 |
1.03 |
26.0 |
21.8 |
1.19 |
G
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G
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G
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1.26 |
C/Up |
| 05/07/2002 |
17.97 |
0.95 |
22.3 |
28.0 |
0.80 |
R
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R
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R
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0.87 |
C/Dn |
| 05/15/2002 |
18.43 |
1.01 |
24.3 |
23.5 |
1.03 |
G
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Y
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G
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1.03 |
C/Up |
| 05/28/2002 |
18.04 |
0.93 |
16.0 |
27.0 |
0.59 |
R
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R
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R
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0.83 |
C/Dn |
| 11/04/2002 |
15.05 |
1.02 |
27.5 |
23.0 |
1.20 |
G
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G
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G
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1.28 |
C/Up |
| 01/24/2003 |
14.85 |
0.95 |
18.7 |
26.7 |
0.70 |
R
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R
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R
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0.85 |
C/Dn |
| 03/21/2003 |
14.99 |
1.00 |
24.4 |
23.5 |
1.04 |
G
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Y
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G
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1.18 |
C/Up |
| 03/15/2004 |
21.35 |
0.98 |
14.50 |
23.10 |
0.63 |
R
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R
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R
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0.84 |
C/Dn |
| 04/05/2004 |
22.32 |
1.05 |
23.10 |
14.60 |
1.58 |
G
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G
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G
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1.35 |
C/Up |
| 04/19/2004 |
21.88 |
0.99 |
18.50 |
21.90 |
0.84 |
Y
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Y
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Y
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0.96 |
C/Dn |
| 06/29/2004 |
21.61 |
0.96 |
20.40 |
20.40 |
1.00 |
G
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Y
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G
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1.17 |
C/Up |
| 07/13/2004 |
21.18 |
0.94 |
17.60 |
24.00 |
0.73 |
Y
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Y
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R
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0.86 |
C/Dn |
| 09/07/2004 |
21.21 |
0.97 |
22.20 |
21.00 |
1.06 |
G
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Y
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G
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1.20 |
C/Up |
| 03/16/2005 |
23.81 |
0.95 |
15.50 |
21.90 |
0.71 |
R
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R
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R
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0.89 |
C/Dn |
| 06/01/2005 |
23.61 |
1.00 |
23.50 |
19.60 |
1.20 |
G
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Y
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G
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1.25 |
C/Up |
| 09/21/2005 |
24.60 |
0.99 |
16.50 |
22.50 |
0.73 |
R
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R
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R
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0.96 |
C/Dn |
| 11/18/2005 |
24.98 |
0.99 |
23.60 |
22.20 |
1.07 |
G
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Y
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G
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1.22 |
C/Up |
| 05/18/2006 |
26.17 |
0.90 |
8.20 |
27.80 |
0.30 |
R
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R
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R
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0.64 |
C/Dn |
| 08/22/2006 |
25.88 |
0.99 |
23.90 |
20.00 |
1.19 |
G
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Y
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G
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1.20 |
C/Up |
| 03/06/2007 |
28.49 |
0.97 |
12.70 |
17.80 |
0.71 |
Y
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Y
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Y
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0.71 |
C/Dn |
| 03/27/2007 |
29.28 |
1.00 |
19.30 |
15.70 |
1.23 |
Y
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Y
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Y
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1.22 |
C/Up |
| 07/26/2007 |
29.76 |
0.88 |
8.90 |
33.10 |
0.27 |
R
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R
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R
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0.70 |
C/Dn |
| 09/27/2007 |
30.48 |
1.01 |
24.20 |
23.30 |
1.03 |
G
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G
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G
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1.35 |
C/Up |
| 11/01/2007 |
30.52 |
1.00 |
21.50 |
24.20 |
0.89 |
R
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Y
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R
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1.07 |
C/Dn |
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| H. DISCUSSION OF RESULTS: |
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| Take a good look at our Market Timing Graph in the Weekly mode. You will see that the Price of the VectorVest Composite rises and falls in a wave like motion. |
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| While past performance is no guarantee of future results, it is quite possible to achieve the results shown in the Special Report, Riding the Wave to Explosive Profits in Up and Down Markets. |
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| All this notwithstanding, there are ways of enhancing performance well beyond those shown in the above example. This method is taught in our 2 1/2 day Executive Premier Workshops. Call 1-800-231-0110 for more information. |
