Reprinted from MarketWatch
Not all bulls are breathing better
By Peter Brimelow, MarketWatch
NEW YORK (MarketWatch)—The bulls are breathing better after Tuesday’s bounceback—but not all of them.
Cabot Market Letter is the fifth-ranked investment letter over the last 12 months, according to the Hulbert Financial Digest, up 57.5% through the end of October vs. 15.06% for the dividend-reinvested Dow Jones Wilshire 5000. Over the past 10 years, it’s up 8.72% annualized vs. 7.4% for the DJ Wilshire, a difference that adds up.
I used to count Cabot as one of the “geezers,” my name for letters who were around at the 1974 low. But editor Carlton Lutts has now been succeeded by his son and long-time co-editor Timothy, who is continuing the tradition of active trading based on a combination of fundamental and technical analysis. I’m unsure how to classify the letter now—maybe a young fogey? But, regardless, Cabot was one of the first geezers to recognize the bull market. (See December 10, 2003 column).
The current correction has seen some bulls dig in their hoofs. (See Nov 26 column). This is especially true among the better-performing letters. (See Mark Hulbert’s Nov. 15 column).
But not Cabot. Its most recent issue, dated November 20, is bluntly bearish. It reports that all three of its proprietary indicators have given sell signals. It summarizes starkly:
“In recent months, we’ve been warning you about the growing divergence in the market that began in June and continued into November. The first public sign of trouble came when the mortgage industry began to implode in July. The selling from that led to a major market bottom on August 16, and from there the market’s major indexes rallied impressively. But the divergence remained in effect, as the broad market languished while a few dozen stocks soared.
“Then, in early October, as the Dow was hitting new all-time highs, the number of stocks hitting new lows began to expand to greater than 40, turning our Two-Second Indicator negative. These then were the early signs of trouble, and key factors that led us to raise cash in October, even as the indexes performed well.
And now the trends have turned officially down. Our intermediate-term Cabot Tides turned negative on November 8, and our long-term Cabot Trend Lines turned negative on November 16.
“Bottom line, the sellers are now in control, which means preservation of cash is your number one priority.”
This could be significant, because the Hulbert Financial Digest calculates that Cabot’s market timing is actually more powerful that its stock selection. The letter is one of just a handful that have beaten the market over the last 15 years, whereas its actual portfolios slightly lagged.
And beating one of the great bull markets in history is quite a trick.
Cabot said in a recent email that subscribers should be “heavily in cash.” One of the few stocks it recommended recently: Chipotle Mexican Grill Inc. (CMG).
But Cabot emphasizes that the bear market, although it will be punctuated by deceptive rallies, will not last forever. It writes: “Market corrections for investors are like winter for a gardener; you don’t get to grow anything, but you can still do some very useful work.”
Accordingly it is building what it calls a “watch list” of stocks for when the market turns around. The heartless Hulbert Financial Digest won’t credit them to Cabot’s performance until it actually issues specific buy recommendations. But they’re still interesting. Four recent ideas:
Eaton Vance Crop.
Janus Cap Group Inc.
Lg Phillip Lcd Co Ltd.
MEMC Electronic Materials, Inc.
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