The Importance of Investor Sentiment

Fashion as Economic Indicator

March to Your Own Drummer

Stock Market Analysis Video: Earnings Preview

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Timing is Everything

From the bear market bottom in 2003 to the bear market bottom in March 2009, subscribers to Cabot Market Letter made a stunning 94%. Compare that to the S&P, which LOST 18% over the same period!
Or consider just the past two years. Cabot Market Letter has beaten the market by 64%, according to Timer Digest, which just ranked Cabot Market Letter third among all long-term timers.
If you’re a Cabot Market Letter subscriber, this will not be surprising. You know how Michael Cintolo helps readers conserve cash when the market is unsupportive and to invest aggressively when the market trend is up. But if you’re not a subscriber yet, you owe it to yourself to take a look at the Cabot Market Letter.

This week’s New York Times Style section brought a story about how fashion trends relate to the economic climate. A similar story was published in 2008 when all was going to hell in a handbasket, announcing that longer hemlines were in for the duration of the recession.

This latest article said quite the opposite. Apparently, colorful prints are the new black. As more positive economic indicators come in each week and the stock market continues its march higher, women are tossing aside their drab clothing in favor of bright colors. (Just a thought, but the changing of the seasons from winter to spring might also have something to do with this … )

According to the Times, these hotter hues–prints especially–signal a recovery … for the fashion world at least. One woman interviewed in the article was quoted as saying, “People are sick of not shopping.”

And that may be true. Last week, I wrote about increasing retail sales and a booming retail stock, Lululemon Atheletica (LULU), which hit another new high this week. As the recession fades, it seems that consumers, women especially, are pulling out their wallets for new duds.

Lululemon isn’t the only retail stock that’s been featured in Cabot Top Ten Report recently. Editor Michael Cintolo also featured the fine clothing retailer Ann Taylor (ANN) in early February.  Here’s what he had to say then:

“No one will argue that AnnTaylor Stores is a gangbuster of a company, but right now it’s following a familiar path for successful retailers during the recession–shake up its product mix, manage sales promotions and clamp down on inventory. That doesn’t sound exciting, but the results are beginning to show. Last week, management said that sales for the quarter ending in January were about $470 million and that earnings would be substantially higher than a year ago. That led analysts to significantly bump up their estimates for the next few quarters (they now see 2010 earnings per share of 66 cents, up from an estimate of 34 cents three months ago), although it’s fair to note that business in general is still struggling, with sales expected to be flat this year. It’s not a good growth story, but AnnTaylor is a turnaround with some potential.

“ANN nearly went bust during the bear market, but it enjoyed a heady run up before settling into a new basing structure last fall. That structure looks like a double bottom (think of the letter W), with the second low undercutting the first low, shaking out the weak holders. Then, last week, ANN surged on huge volume on management’s earnings news, setting up a breakout in the days or weeks to come. In total, we think you could buy a little here, and then possibly buy more if (but only if!) you see a powerful breakout above 16.3. A meaningful drop below 14 would be bearish.”

And the stock has broken out since Mike wrote that! In fact, Cabot Top Ten Report subscribers are up nearly 60% from the original buy range. It looks like retail stocks have more room to grow, so if you haven’t gotten in on any stocks in this sector, there’s still time.

And the best place to find out which stocks will continue to ride this wave higher is Cabot Top Ten Report. Subscribers are enjoying profits of over 30% in LULU and there’s more to come. Don’t miss the next issue that comes out on Monday.

As you may know, I have a Twitter account that lets me keep in touch with subscribers and other investors. In addition to “meeting” people that I never would have otherwise, it’s also a great barometer for stock market sentiment, which we consider a secondary (but still important) market timing indicator.

This week, people were exclaiming with glee when the market was rocketing higher. Of course, I’m always happy to see the market in the green. But this unadulterated joy made me a little nervous. If you’re new to investing this may seem odd. But longtime readers will know that in the stock market, it pays to be contrary.

When the vast majority of investors think stocks will go higher forever, you know they’re in for a correction … or worse. Why?  Because everyone’s already bought in!  And when everyone thinks the market is going to sink to zero, you know it’s likely to turn positive, as most investors have already sold shares.

This was true both when the market topped in October 2007 and when it bottomed in March 2009. When trends get to such extremes, it takes a disciplined mind to see the exuberance (or misery) for what it really is.

While it’s not possible to pinpoint tops and bottoms based on sentiment, contrary opinion can nonetheless help you become a little more conservative near tops and a tad more aggressive near bottoms. And while these small adjustments in your portfolio may seem insignificant, they become a big help to your portfolio performance because they come near market turning points.

As we often say, the market top happens when the last buyer has bought and the bottom happens when the last seller has sold. We don’t think we’re at a market top right now, but after being in a bull market for well over a year (including an especially huge run since the start of March), we could see a pullback. In fact, the news of Goldman being charged with fraud could be the catalyst that kicks off such a decline. Sentiment will then right itself, preparing the market for another leg higher and so on.

Of course, in the long run, the market is going to follow fundamental factors such as earnings, sales, inflation and interest rates. But in the intermediate-term (one to four months into the future), sentiment has a powerful effect on the market.

Now on to Cabot’s weekly Stock Market Analysis Video with Cabot China & Emerging Markets Report Editor Paul Goodwin. Paul points out that the markets are steaming ahead, showing lots of optimism as the indexes head higher. This is also when you can begin to get worried, but it’s important to remember that trends can continue longer than you think.

Paul also discusses earnings season, which can send stocks flying higher or plunging down. Remember that a good earnings report can mean that stocks are buyable immediately after.

Paul gives earnings previews for Vmware (VMW), Boeing (BA) and (AMZN). There are three high quality stocks to look at next week that will likely do well if earnings are good.

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In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, I have links below to each issue.

Cabot Wealth Advisory 4/12/10 – Triclosan and Kyrgyzstan

On Monday, Timothy Lutts wrote about the recent messy little coup in Kyrgyzstan and the country’s little-discussed history. Tim also discussed some of the bull market’s top stocks and a little-known company that was recently featured in Cabot Market Letter.

Cabot Wealth Advisory 4/15/10 – Learning from Two of History’s Giants

On Thursday, Michael Cintolo wrote about an often-overlooked economic argument for the reduction of taxes via a speech by Calvin Coolidge. Mike also discussed what Jesse Livermore can teach us about market cycles and what the market is telling us right now. Mike finished by writing about a stock that’s a possible pre-earnings buy. Featured stock: (AMZN).

Until next time,

Elyse Andrews
Editor of Cabot Wealth Advisory

P.S. Follow me on Twitter: And become a fan of Cabot on Facebook:


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