Reprinted from MarketWatch.com:
Bears’ glass half empty or half full?
Commentary: That depends on who’s doing the measurement
By Peter Brimelow, MarketWatch November 20, 2008
NEW YORK (MarketWatch)—The Dow is down below 8,000 again. Is the bear market half-empty or half-full?
In the half empty camp: Dow Theory letters’ Richard Russell. He wrote Wednesday night: “You may not realize it, but the Transports have already broken below their October lows -- up until today, the Industrials have not confirmed. Alas, the market has rendered its verdict-- today the Industrials closed below their Oct. 27 low. The primary bear market was re-confirmed. The direction of the market is to lower levels, how much lower, the Dow Theory can not tell us. The tragedy continues to play out, all that remains is the 50% principle level of 7,470 [half the bull market peak] and the 2002 low of 7,286.”
I continue to watch Russell because this legendary veteran did call the 1974 low and (more or less) the 2000 peak. His relentless skepticism finally wavered in 2007, from his point of view a Grecian tragedy, but it has resumed in spades, correctly to date.
But note Russell does see support (maybe) in the low 7,000s. This murderous market could reach that level in a day or two.
Which brings us to the half-full camp: Michael Cintolo‘s Cabot Market Letter.
Like Russell, Cintolo is out of the market right now. His letter published Wednesday night announced the sale of his last holding, ProShares Ultra S&P500 which he bought in October.
He says frankly that he’d like to hold, because he thinks there’s a chance of a bounce, which would hugely benefit this leveraged play. But Cintolo believes in portfolio discipline and he’s selling SSO because it’s declined to a point that has triggered his loss limit.
Essentially, Cintolo’s current position is a slightly more cheerful version of his embattled stance when I last checked: stay in cash, but be ready to buy. See October 9 column.
In the short term, Cintolo is almost hopeful, although Wednesday’s action was obviously a surprise. He writes: “You can see how the Dow has tested the 8,000 level several times since early October ... you’ll also see that the number of new lows has declined sharply on each foray lower. Even today’s figure was relatively contained. That’s a sign that selling pressures are gradually easing (believe it or not), which is a characteristic seen at every major low ... we wouldn’t put it past the market to rally off this 8,000 area and begin a sustainable upmove.”
Yeah, well, we’ll find out very quickly.
But there’s a prize here which explains why letters strain to spot bottoms, despite the rude comments by readers whenever I report their efforts. Cintolo notes: “In the year following the 10 largest bear markets in history, the Dow rises an average of 44%, with the leaders doing even better.”
The Cabot Market Letter is no Pollyanna. It broke with the top-performers’ bullish consensus and caught a significant break a year ago. See November 28, 2007 column.
Over the year to date through October, Cabot is down just negative 10.9% by Hulbert Financial Digest count, vs. negative 32.9% for the dividend-reinvested Dow Jones Wilshire 5000. Over the past 12 months, Cabot is down a mere negative 17.62% vs. 36.31% for the total return DJ-Wilshire 5000.
Nowadays, that looks good.
Longer term, Cabot has done even better. Over the past three years, the letter has achieved an annualized gain of 6.24%, vs. negative 5.31% annualized for the total return DJ-W.
Over the past 10 years, the letter has achieved a annualized gain of 7.57, vs. 1.26% annualized for the total return DJ-W.
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