Reprinted from MarketWatch:
Reinvented Cabot still cautious
Commentary: Bearish Cabot not sold on stock swing
By Peter Brimelow, January 10, 2008
NEW YORK (MarketWatch)—Stocks snap back—but a vindicated bear is still a cautious one.
Cabot Growth Investor was one of our Top Ten Letters for 2007. See Dec. 27 column. It was one of the first letters to recognize the post-2002 bull market. But in November, when many of its fellow bulls were beginning to bellow again, Cabot turned bearish. See Nov. 28 column.
Stocks are now lower and the mood is much worse. But, after momentarily reconsidering, Cabot is still bearish.
A recent hotline said: “The market remains under pressure, and we continue to counsel caution. Sometime in the future this weakness will end and the uptrend will resume, but until then the prudent course is to conserve cash. Wait until the market is on your side.”
Cabot follows an extremely disciplined market-timing system, using proprietary short-, intermediate- and long-term indicators, apparently based on moving averages.
All of Cabot’s indicators were bearish in November. But just after Christmas, its intermediate indicator, which it calls the “Cabot Tides,” went briefly bullish.
In response, Cabot did add two new stocks (see below). But in its Jan. 3 issue, the service worried about the buy signal, because its other indicators were bearish and because of its suspicion that “end-of the-year forces were playing tricks with at least some of our indicators.”
Cabot was philosophical about waiting to see what happens. It wrote:
“Remember, history shows that our biggest winners aren’t bought until several weeks after the initial market buy signal. The reason? It takes time for the market’s real leaders to identify themselves. Just as the early leaders in a horse race often tire mid-race, the early leaders after a market buy signal frequently lack the power to stay the course. Sometimes they’re stocks that are simply bouncing off oversold conditions, and sometimes they’re remnants of the previous bull cycles, and thus in the latter stages of their advances.”
Market timing better than stock selection
Attention should be probably paid to Cabot’s trading thoughts for a new reason. Typically, since the Hulbert Financial Digest began following the Cabot Market Letter in 1980, its market timing has been much better than its stock selection. In fact, Cabot is one of a handful to have beaten the market on a risk-adjusted basis over the last 15 years—no easy feat. Its portfolios, however, have lagged.
But something seems to have happened to Cabot’s stock selection. Over the last 12 months, by HFD count, the letter’s portfolio was up a very strong 40.98% vs. just 5.62% for the dividend-reinvested Dow Jones Wilshire 5000. Over the last five years, Cabot is up 18.76% annualized vs. 14.01% annualized for the total-return DJ Wilshire.
Perhaps meanly, I wonder if this had anything to do with the retirement of the firm’s founder, Carlton Lutts, and the succession of his son, Timothy Lutts. Or maybe it’s the effect of global warming on the snow up there in Salem, Massachusetts.
In its January issue, the Cabot Market Letter reported its model portfolio 48% in cash. The two new stocks it added: OptionsXpress Holdings Inc. (OXPS) and Transocean Inc (RIG).
Cabot also maintains a “watch list” of stocks it says it’s thinking of recommending. The ruthless Hulbert system ignores these. But I’m intrigued to see that one of them is Nasdaq Stock Market Inc. (NDAQ).
Cabot describes it as “a mover and shaker in the exchange industry, Nasdaq sports accelerating earnings growth thanks to good business conditions and bold acquisitions in recent months.”