Reprinted from MarketWatch:
Cabot says stocks have bottomed
It also sees market putting pieces in place for next big move up
By Peter Brimelow, April 23, 2008
NEW YORK (MarketWatch)—Are stocks bottoming? One top-performing letter is increasingly convinced that they are.
The long-established Cabot Market Letter, now edited by Michael Cintolo, has been historically bullish. But it intrigued me by breaking from the top-performers’ bullish consensus last fall. It was right. See Nov. 28, 2007 column
More recently, Cabot has been slowly edging back into the market. See March 6 column
It’s now about 50% in stocks, although its precise asset allocation has to be deduced by an entrail-reading process that is very irritating to me and the Hulbert Financial Digest’s Cabot-watcher, John Kimble, who kindly provided his interpretation.
Cabot’s credentials: Currently, it’s the fourth-best performer over the past 12 months according to the Hulbert Financial Digest, up 36.7% vs. negative 5.76% for the dividend-reinvested Dow Jones Wilshire 5000. Over the past five years, Cabot was up a strong 18.99% annualized vs. 12.45% for the total-return DJ-Wilshire 5000.
Since the HFD began following Cabot in 1980, the letter has lagged the stock market, achieving a 7.7% annualized gain, vs. 11.5% annualized for the total return DJ-Wilshire. This probably reflects changes in editors and technique.
Cabot’s longer-term problem also points to relatively weak stock selection. Judged purely on market timing, it’s one of the very few letters to have beaten the market on a risk-adjusted basis—a remarkable feat in one of the great bull markets of history.
In its latest letter, Cabot provides this succinct summary of its outlook and its approach: “We’ve learned a few things in our 38 years of producing this Letter, and one that we keep coming back to is this: The market takes time to set up a major move, often spending many weeks slyly moving up and down, confusing as many investors as it can, before launching into a strong trend. We saw a good example of this last year, in fact.
“According to our measures, the market experienced a full six to seven months of topping action, as first mortgage lenders, then brokers, then banks, then transports, then retailers, and then semiconductors topped out during the summer and fall. We did great by focusing on what was working, but by mid-October, the number of good-looking leading stocks was tiny. And that’s when the bear forces took control.
“During the past couple of months, we believe we’re seeing the opposite. Beginning in late January, when an enormous 1,114 stocks hit new lows on the NYSE, the market has been building a sustainable bottom. We’ve seen plenty of bad news, lots of bobbing and weaving by the major indexes, and a successful re-test of the January low on the Bear Stearns failure in March. And now we’re seeing a gradual broadening out of the market’s leadership. Thus, step by step, the market is putting the pieces in place for its next big upmove. In fact, that upmove may be underway!”
Cabot says that subscribers should be “leaning bullish,” but that “we’re still in the first innings.” It recommends watching stocks that gap upwards on positive earnings surprises, and selling stocks that gap down on bad news, as it has just done with Intuitive Surgical Inc. (ISRG), despite being ahead some 25%.
Cabot’s rationale is pleasingly thoughtful (at least to me): “The common questions whenever a great growth company collapses on earnings are, ‘Was the report that bad? Isn’t it still a good company?’ And the answers are, no, the report wasn’t that bad, and yes, it’s still a good company. But you should still sell the stock!
“We base our decisions on how the market actually works, and we know that a big earnings gap lower, especially after a stock has enjoyed a huge advance, often spells the end for a stock’s up cycle ... at least in the intermediate term. That’s especially true now, as ISRG has been repeatedly repulsed from the 360 level in recent months, resulting in a toppy-looking pattern.”
Cabot has replaced Intuitive in its Model Portfolio with Continental Resources Inc. (CLR).
Link to article on MarketWatch.com
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