Headley, and cash, are king

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And the Strategy Lab bragging rights, such as they are this round, go to . . .

AcceleratorPrice Headley finished just a few hundredths of a percentage point ahead of High IQ trader Kelley Wright, and both ended up a whopping 11 percentage points ahead of the S&P 500 Index ($INX) over the six months of Round 16.

Of course, both also finished in the red, which pretty much sums up what has happened to the market and our players since we started in mid-July. The S&P 500's return in this round is the worst in any Lab round since the tech crash and 9/11, and our players' totals are some of the lowest.

"The severity of the recent sell-off caught me by surprise, as my prior portfolio gain has been given back as I went from all cash to fully invested early last week," Headley writes in his final journal. "You’d think I’d be happy in crushing the market averages . . . but I’m in this game to make money."

Wright, who held the lead in our game for the longest period this round, is similarly humble about his totals. Beating this market, he writes, is "a hollow victory. In the real world, beating this market still translates into a loss. And I don't like to take losses, period."

Victims of volatility

It wasn't just a bad market; we've had those since we started Strategy Lab, and usually at least one trader finds a short or some other inventive play to produce a positive return.

But this time, the killer was volatility. The S&P hit a new all-time high right as we started, then dropped 10%. It climbed to another new high in October, then fell 11%. It valiantly tried to recover through early December, then dropped to its lowest point of the round.

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Roughly a month ago, five of our six players were in positive territory and even or ahead of the S&P 500. Then came what we might call the Bad Santa Rally. Since Christmas, the S&P and Dow industrials ($INDU) are down 7%, the Nasdaq Composite Index ($COMPX) is down more than 10%.

So what worked this time around? Well, defense. Perhaps we should change the name of our game to Survivor.

Cash was king

Headley's initial buys worked out fairly well, so he took profits early in October -- among them, a 35% gain on Echelon (ELON, news, msgs), 21% on VMware (VMW, news, msgs) and 15% on Ceragon Networks (CRNT, news, msgs). But Headley is a specialist in reading market tea leaves, and his best moves this round were arguably spotting trouble and sitting things out. He sat for three weeks in cash after taking profits in October. In November, he bought back in and suffered a little. He sold out again on Dec. 3, locking in a 3.2% gain.

But recently, advising readers to buy when there's still "blood in the water," he bought two index-tracking ETFs. Blood has, of course, continued to flow, and he ended with both positions in the red. They haven't lost much considering the market of late, but they did lower his performance to below even.

It's odd to see cash as king in Strategy Lab; our bank doesn't even pay interest. But there you go.

Safe and sane

Wright, whose strategy is by nature fairly risk-averse, finished within a percentage point of Headley. He specializes in what the system at Investment Quality Trends labels "select blue chips" -- major stocks, many of them brand names, and all long-term buys with long records of success.

Wright led our game through much of the round, in fact, on the strength of Barrick Gold (ABX, news, msgs) and a package of consumer staples that included McDonald's (MCD, news, msgs), Coca-Cola (KO, news, msgs), PepsiCo (PEP, news, msgs), Johnson & Johnson (JNJ, news, msgs) and Colgate Palmolive (CL, news, msgs).

None turned into dogs -- he ends with Barrick up 49%; Colgate, PepsiCo and Coca-Cola up in double digits; Johnson & Johnson up 5%; and McDonald's up by 4%. But they weren't immune, and they have slipped far enough in 2008 to lower his total return below the even mark.

We should say, since they won't, that beating the market by 11 percentage points is no small victory. Yes, the numbers pale beside the totals rung up by the top players in our Strategy Lab Open, which let readers play along with the pros. But amateurs can take bigger chances; we ask our pros to trade as they do with real money.

And, at least as critically, the Open began after the worst of the first market downturn and ended at the end of 2007. Open players missed this most recent run of fun. Our pros probably wish we had ended their game a couple of weeks ago, too. Consider:

Not-so-happy new year

Global Guru Nicholas Vardy started out with a portfolio of foreign picks that had done exceptionally well for some time. But in that first downturn, back in August, they plunged and his stop-loss orders took him out of everything. Unfortunate, since most bounced back, at least for a while.

Eventually he bounced back strongly, too. He ends with a 44% gain on Potash of Saskatchewan (POT, news, msgs) and a 17% win on Companhia Vale do Rio Doce (RIO, news, msgs), two stocks that led his portfolio back to as much as an 8% gain. He stayed in the black until 2008 -- when the latest downturn took him 9% into the read.

All-Star Teamtrader Ken Kam entered the round as our defending champ and had, in fact, won two of our previous three rounds. With a 20% or so gain, he would have done in the Lab what he tries to do in real life: doubling his money in two years.

But, he writes in his final journal, he misjudged the subprime mess -- seeing it as just the latest market panic attack, rather than a major crisis. "In August, I felt pretty confident that my portfolio would do well in spite of the subprime situation because I didn’t own any of the subprime lenders," he writes, adding "it’s hard to tell the difference between a panic attack and a downturn. For me, the difference is whether anything significant has changed. This round, something significant did change."

Apart from Elan (ELN, news, msgs), the drug company that's been one of his best Lab plays for more than a year, nothing quite worked out. Double-digit losing positions included US Global Investors (GROW, news, msgs), a double for him a couple of rounds back but beaten up with the financial sector this time. Positions in energy and raw materials meant as hedges on a slow U.S. economy didn't hedge.

Still, while he trailed for most of the round, his picks help up relatively well in 2008, and he ended our game middle of the pack. Perhaps it bodes well for another round. We did title his latest journal "With doomsday unlikely, it may be buying time."

Beaten up in the end

Dog Pound player Robert Walberg's Lab strategy is built around finding beaten-down stocks ready to turn around. This market, though, was much more about the beatings than the recoveries. As he recounts in "I could have been more cautious": "A couple of months ago, I was riding a bunch of unloved losers to first place in the latest round of Strategy Lab. Then, the stock market's tone switched dramatically as the credit crunch and mortgage mess erupted into one very big crisis. Suddenly, investors had about as much appetite for risk as someone suffering from anorexia has for a triple cheeseburger. The result: My stocks took a beating."

He did score nice wins on Las Vegas Sands (LVS, news, msgs), up 43%, and American Eagle Outfitters (AEO, news, msgs), up nearly 10%, both bought and sold by early October. But the latest downturn took him from positive return to a 20%-plus loss. Hammered the worst: SiRF Technology (SIRF, news, msgs), off 43%.

ChangeWave InvestorTobin Smith was way up and down this round, posting a double-digit gain early on and yet ending off more than 24%. He specializes in finding high-risk, high-potential stocks about to take off, and found big gains at times this round on Chinese solar stocks -- one was, in fact, a double for him early in the round. But those stocks have been among the most volatile during the past six months, and he ended with mixed results: an 18% gain on Ascent Solar Technologies (ASTI, news, msgs), his best overall position, and a 9% win with LDK Solar (LDK, news, msgs), but a 34% decline on China Sunergy (CSUN, news, msgs).

Truth is, Smith just didn't spend much time managing his portfolio. Big early gains were gone by the time he went all cash in mid-November. Around Thanksgiving, thinking a market bottom was in sight, he went back into stocks. And, like Walberg's, his portfolio plunged precipitously in the most recent downturn. Worst loss of the round: a 59% drop in BigBand Networks (BBND, news, msgs).

He also sounds least optimistic for the road immediately ahead, ending the round this week with "10 reasons why a recession is coming." Prepare for the worst while hoping for the best, he advises -- and that's as good a final word on this round as any.

On to Round 17

So it's time to mix things up and hope the next six-month round brings better days.

Headley found he didn't have enough time to really run his Lab portfolio and write journals, so our Round 16 champ bows out. We'll also say farewell to Smith and Vardy, who had similar time crunches.

Wright, our other big market beater, will return. So will Kam, who as well as his work with us on the Strategy Lab Open produced many of the best read journals of the round, and Walberg, who writes regularly about some of readers' favorite stock names and will have plenty of dogs to choose from after this market mess.

As we noted last week, they'll be joined by Vad Yazvinski, the Open champ who racked up a 34% return while become the top-rated blogger in the game. He'll have lots of good advice to share and give the pros a run for their money.

Next week in this space, we'll announce our other two incoming players as we officially roll into Round 17. The first trades will go up on Monday, Jan. 28.

Meanwhile, I'd like to invite you to sign up now for the second round of our Strategy Lab Open and see how your skills measure up. However you do, it's become a great forum for talking about stocks and learning about techniques that can make you money.

Meet the strategists at The Money Show

Once again, we're gathering a panel of players from the upcoming round of Strategy Lab for a panel discussion at the World Money Show in Orlando, Fla., which runs from Feb. 6-9 at The Gaylord Palms Resort. They'll be among more than 120 money experts and gurus offering ideas on what to buy and sell in 2008. Admission is free for MSN Money users. Call 800/970-4355 and mention priority code #010333, or click here to register online.

The Strategy Lab panel on the best stocks for the first half runs from 8:55-9:40 a.m. ET on Friday, Feb. 8. Can't join us? Click here to register for the free Webcast.

Jim Jubak’s talk on 10 stocks you can use for “buying China without the China risk” will also be broadcast as a live Webcast on Friday, Feb. 8, from 8-8:45 a.m. ET. Click here for details and to register in advance.

By Ron Prichard