Cabot sidles back toward bears’ den
Top performer again betting that stocks haven’t hit bottom yet
By Peter Brimelow, MarketWatch June 25, 2008
NEW YORK (MarketWatch)—The Fed leaves stocks flat. But one top-performing letter is sidling back to bearishness, at least short-term.
The Cabot Market Letter correctly broke from the top-performers’ generally bullish consensus last winter. See Nov. 28 column
When I last looked, however, it was beginning to conclude that stocks had bottomed. See April 23 column
But now Cabot has reluctantly withdrawn its hoof (or paw, depending how you look at it) from the market. After selling some stock recently, it’s down to 50% cash. In a hotline Wednesday night, it summarized: “Remain defensive. The bears are not exactly running wild on Wall Street, but the trend of the market and most stocks is down.”
Currently, Cabot is the third-best performing letter over the past 12 months according to the Hulbert Financial Digest, up 30.21% vs. negative 6.31% for the dividend-reinvested Dow Jones Wilshire 5000. Over the past three years, the letter has achieved a 12.32% annualized gain, vs. 8.32% annualized for the total return DJ-Wilshire 5000. Over the past 10 years, the letter has achieved a 9.32% annualized gain, vs. 4.83% annualized for the total return DJ-Wilshire 5000.
Cabot doesn’t seem to want to be bearish. It says its long-tem technical indicator is still bullish. But it is intermediate and short-term indicators have turned negative, which it doesn’t like. Showing a disciplined commitment to its indicators, it writes: “We could speculate about the reason for this downtrend. High oil prices are an obvious suspect; high food costs are another. Other possible factors: floods in the Midwest, our high national debt, the continuing weakness in housing, the slow cleaning-up of the credit mess, the war in Iraq and the uncertainty about the identity of our next president. Or maybe it’s just a typical seasonal slowdown; pretty soon it’ll be the July 4 holiday and Wall Street will get a little quieter.
“But all this ‘explaining’ is unnecessary and unhelpful. The plain fact is that the market is no longer as supportive of our growth investing efforts as it had been previously.”
Cabot does say hopefully: “We’re doing our best not to become too bearish, for a few reasons. First, the market is once again re-testing its lows of this year [it reached similar levels in January and March.] Second, the number of new lows remains far fewer this time around than at either of the two prior bottoms.
“Third, the Nasdaq and other growth-oriented indexes remain relatively stronger than the Dow or S&P 500, which is almost always a positive sign. [Our longer-term Cabot Trend Lines are still positive, mainly because of strength from the ML 100, a technology-based index.] And fourth, pessimism is once again reaching extreme levels—less than one-third of all newsletters are now bullish, a very low level—something that usually leads to turnarounds.”
Cabot has a relatively small portfolio. This week it sold Corning Inc. (GLW) and Sohu Com Inc. (SOHU). Most of its stocks are in the ambiguous category of “hold”. Currently, it rates only two of them as buys: Visa Inc. (V) and Salesforce.com, Inc. (CRM).
Visa, it says, “showed some bullish action yesterday, successfully testing its 50-day moving average for the second time in three weeks. The longer it holds up, the better, but the weak market is obviously weighing on the shares...if you’re not yet onboard, buying a little (maybe half your ‘normal’ position) around here seems like a good risk to take.”
About Salesforce.com, it says: “A squirrelly stock, bouncing around a few points at a time. Overall, however, we believe this firm is the hands-down leader in ‘on demand’ software, and the stock is resisting the market’s downward pull.”
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