How Cabot’s Emerging Markets Timer Works

The Cabot Emerging Markets Timer is our indicator for measuring the intermediate-term trend of emerging markets-related stocks. The indicator uses the iShares Emerging Markets Fund (EEM), which includes emerging markets stocks traded on U.S. exchanges.

Why trend-following? Why not try to pick a top and bottom of each cycle with a bunch of technical indicators? Because we don’t know any investor who has consistently succeeded in picking tops and bottoms. There is no system that can do so consistently.

But there is a system for staying on the right side of the trend. We’ve been using it for decades, and tens of thousands of subscribers have found it very rewarding. With this system, you’re guaranteed to remain heavily invested during every major emerging market upmove…and you’re guaranteed to be defensive, holding some cash, when the market decides to enter an intermediate-term downmove. Here’s how it works:

In addition to the index itself, we look at the index’s 25-day and 50-day moving averages. (A moving average simply smoothes out the daily fluctuations in any index. A 25-day moving average, for instance, takes each of the last 25 closing values, adds them up, and then divides by 25.) Thus, there are three inputs—the EEM Fund, its 25-day moving average and its 50-day moving average.

The Emerging Market Timer is deemed positive (and thus the trend of emerging markets-related stocks deemed bullish) when two criteria are met: First, the EEM Fund must be standing above the lower of its two moving averages; and second, that lower moving average must itself be advancing. When both of these criteria are not met, the Emerging Markets Timer is negative, and the trend of emerging markets-related stocks is deemed bearish.

This is a similar system to the one used in our flagship publication, the Cabot Growth Investor, that has earned it recognition as having one of the best market timing records among all advisories. We believe it will provide similar results for you in the Cabot Global Stocks Explorer.

Timothy Lutts

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