Cabot uses three primary stock market timing indicators in all Cabot growth letters (Cabot Market Letter, Cabot Top Ten Trader, and Cabot China & Emerging Markets Report). In addition to these indicators, Cabot China & Emerging Markets Report uses the Cabot Emerging Markets Timer.
Cabot Trend Lines
The Cabot Trend Lines are our unique way of determining the long-term trend of the stock market. As long as both the S&P 500 Index and the Nasdaq Composite fluctuate above their respective trend lines, we consider the market to be bullish. If both indexes are below their trend lines, we are in a bear market.
We use five different market indexes to help us determine the overall intermediate-term direction of the stock market. They are: S&P 500, NYSE Composite, Nasdaq Composite, S&P 600 Small Cap and S&P 400 MidCap. The market is considered to be advancing on an intermediate-term basis if at least three of these five indexes are advancing. And contrarily, the market is deemed to be declining if at least three of these five are declining.
The Two-Second Indicator’s specialty is detecting market tops. When the number of daily new lows on the NYSE is greater than 40 while the major indexes are rising to new peaks, look out! It’s telling you that, internally, sellers are in control of most stocks, and the indexes are masking this weakness. However, if new lows expand to greater than 40 after the indexes are five days or longer off their peaks, the Two-Second Market Timing Indicator is simply telling you the market is entering a correction. This correction could be deep, and thus you should still practice caution. Finally, when new lows are less than 40 day after day, that’s a sign of a healthy, robust market – the buyers are firmly in control of most stocks.
Cabot Emerging Markets Timer
The Cabot Emerging Markets Timer is a trailing market timing indicator that uses the performance of the iShares MSCI Emerging Markets Index (EEM) to gauge the trend of emerging market stocks. The EM Timer is considered to be positive when the Emerging Markets Index is above the lower of either the 25-day or 50-day moving average. When the Index falls below both its 25- and 50-day moving averages, the EM Timer turns negative and the Cabot China & Emerging Markets Report adopts a defensive stance. The EM Timer will not be considered as having turned positive until the level of the Emerging Markets Index once again moves above either the 25- or 50-day moving average, and that average is itself trending upward.