Reprinted from MarketWatch
Cabot Market Letter Eyes Rally Possibility
By Peter Brimelow, March 16, 2009
NEW YORK (MarketWatch)—Maybe this rally is for real: a top-performing but notably cautious letter seems on the point of endorsing it.
I got especially interested in the Cabot Market Letter in late 2007 when it broke with the Wall Street triumphalist consensus (remember the Wall Street triumphalist consensus? Sigh!) and caught what then seemed like a sharp market break. (See Nov. 28, 2007 column.)
Cabot was calm but cautious during the Crash of 2008. (See Oct. 9, 2008 column.) It did not escape entirely unscathed. Over the past 12 months, the letter is down 12.94% by Hulbert Financial Digest count.
But that’s, of course, compared to a decline of 43.32% for the dividend-reinvested Dow Jones Wilshire 5000.
Over the longer run, Cabot is among the relatively small number of letters that are still above water. Over the past five years, it has achieved a 3.69% annualized gain, vs. negative 6.14% annualized for the total return DJ-Wilshire 5000. Over the past 10 years, the letter has achieved a 2.33% annualized gain, vs. a loss of 2.55% annualized for the total return DJ-W 5000.
The Cabot method is to combine fundamental stock selection (earnings growth, leverage, assets per share, etc.) with a market-timing system based mostly on moving averages, i.e. whether selected indexes are above or below their longer-term moving average prices. It sounds simplistic, but moving average systems do work. (See Mark Hulbert’s May 10, 2007 column.)
And the fact that Cabot uses this system makes the letter’s current increasing interest in stocks even more significant. It’s a trend-following system, rather than an attempt to call a market turn. Trend-following systems don’t catch the beginning or end of a market move: they’re designed to get you safely in for most of the ride.
In its last issue, dated March 11, Cabot said:
“The current mood of investors is grim. Consumer confidence is at an all-time low, and the latest survey of the American Association of Individual Investors reveals the greatest percentage of bears in history. So it’s very comfortable for most investors to be bearish; pundits who predict things like Dow 4,000 are given plenty of airtime. (Similarly, politicians and giant companies who predict disaster unless they’re given billions of dollars to spend are easily believed.) But this bearishness, though comfortable, is unlikely to be rewarded.”
Cabot continued: “We note similarities in the recent extreme times. Following its huge advance of 1999, the market tacked on another 25% gain into March 2000. Now, the market’s 40% decline last year has been followed by a further 25% plunge into March. We think it’s gone far enough.”
Cabot concluded: “That doesn’t mean we’re turning bullish; in fact our Model Portfolio remains 100% in cash! But it does mean we’ll be very willing to buy aggressively as soon as our indicators give us the signal.”
Among stocks on Cabot’s current Watch List (that is, they’ve not been bought yet): Netflix, Inc. (NFLX), Spdr Gold Trust. (GLD) and Starent Networks Corp. (STAR).
Cabot ranks as “AVOID” Celgene Corporation (CELG).
Cabot’s long- and medium-term indicators were still bearish as of March 11, but its short-term indicator was rated cautious. Cabot wrote: “What we want to see from here is for the number of new NYSE lows to rapidly decline to fewer than 40, and (most importantly) stay at that level for a few days in a row.”
On Friday, lows fell to 15. End of Story.