Market Timing Simplified

Correction: In the Cabot Wealth Advisory below, I gave the wrong symbols for the iShares S&P 500 ETF and the S&P 500 Growth ETF.  It’s not clear to me how I got the first letter of each wrong.  Fortunately, there are no stocks or ETFs that trade on U.S. exchanges under the symbols I gave.  So, without giving any excuses, I’d like to apologize for any confusion this might have caused.  The correct symbol for the iShares S&P 500 Index Fund is IVV.  The correct symbol for the iShares S&P 500 Growth Index Fund is IVW.

Simplified Cabot Market Timer

In Rant Mode

An Investment Idea for After the Buy Signal

The U.S. stock market has been showing a few signs of life recently, which is good.  I hope the period of catastrophic declines we’ve been going through hasn’t hurt your portfolio too badly (although I suspect the pain has been pretty widespread).

I have been telling the subscribers to the investment advisory I edit, Cabot China & Emerging Markets Report, to be more than 80% in cash for a while now.  In fact, I sold the last stock from the Report’s portfolio on October 16.  Before that, the Report had been cutting back steadily since July. 

It’s a message you probably read in these pages, too.  Every editor of Cabot’s growth newsletters has had the same advice.  I hope you took our advice to heart, because it is the only rational way to handle this kind of negative market.

Markets don’t stay down forever, and this historic selloff has created a whole raft of bargain stocks.  There’s just one problem.

How do you know when to get back into the market?

Here’s an easy way to tell, one that’s based on one of Cabot’s powerful set of market timing indicators, the Cabot Tides.

This method will help you figure out when the market’s recovery is robust enough to make it worth your while to start investing again.  It won’t guarantee success for either the market or your individual investments, but it will put the odds in your favor and give you the confidence you need to overcome the aftereffects of this bearish period.

Step One: Get an online chart of the S&P 500 Index.  This will be available on most sites that feature finance sections.  Yahoo! Finance: use symbol ^GSPC or StockCharts: use symbol $SPX will do fine, although just about any chart facility will do.

Step Two: Set the chart to show two moving averages, the 25-day and the 50-day.  Yahoo! uses pull-down menus, while StockCharts keeps its controls below the chart.

To get a new buy signal, you need two things:

First, the Index itself must rise above the lower of the two moving averages.  (As I write this, the Index is pulling back to just below the 25-day moving average).

Second, the line for the moving average must be moving up.  (Today, the 25-day average is still trending resolutely down.)

Both of these conditions must be met to produce a new buy signal.  When you get a buy signal, you can start putting your money back to work, although you will still need to follow the other rules for growth investing, such as buying on pullbacks, cutting your losses short, averaging up in your winners and stepping into the market gradually.

This indicator–I’ll call it the Simplified Cabot Market Timer–isn’t as finely tuned as the timing indicators refined by the Cabot Market Letter during its 38 years of publication, but it will serve you well if you follow its advice.

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I think of myself as a very reasonable man, and I don’t resort to the rant mode often.  It requires lots of energy and sheds very little light.  But with a watershed election just behind us, I’ve been thinking more than usual about the national policies of the United States, and there’s one huge issue that just drives me nuts.

The issue is energy, and our national energy policy … or lack of one.  And that’s a crime.

After all, it’s not as if the high cost and limited supply of oil just sneaked up on us.  Is our sense of history so stunted that the Oil Crisis of the 1970s is too ancient to be considered relevant?

We learned during the Oil Embargo, when OPEC was first flexing its muscles, that being dependent on foreign oil was painful, embarrassing and potentially disastrous.  Foreign countries used the biggest hammer they had to put several dents in our collective head, with economic consequences that lasted for years.

Accordingly, given that protecting our citizens from threats posed by foreign powers is the prime constitutional duty handed to those who occupy our highest offices, it became the primary duty of the federal government to take that hammer away.  It’s laughably obvious. 

It was so obvious, in fact, that after a few years of cheesy miniature cars and a small burst of solar energy buildout, the entire alternative energy/energy conservation movement was allowed to fall off the national agenda.

The movement continued underground, but the federal government, the entity with the responsibility to protect our nation (and sufficient power to actually get the job done) just dropped the ball. 

*No ambitious standards for automobile fleet fuel efficiency.
*No massive support for wind or solar or tidal or geothermal or even nuclear, for that matter.
*No game-changing commitment to railroads or public transportation.

And remember, this is not a matter of environmental or social policy, this is about the economic foundation of our economy and its vulnerability to foreign threats. 

This ball has been dropped so many times by so many people that I can’t even figure out who to blame!  The administrations (of both parties) for not leading forcefully?  The legislative branch for caving in to lobbyists of auto and oil companies?  Regulatory agencies for slacking off on enforcing even the wimpy standards we have on the books?  Private citizens for acting like drunken pigs in a corn bin?

The private sector has been making progress, but it’s been irregular and unsupported.  It’s not really fair to expect giant oil companies to demonstrate a huge commitment to deploying technologies that will interfere with the sales of existing products.  The scientists at Big Oil and Big Auto have made some awesome discoveries, but the real breakthroughs (like First Solar’s reduced-silicon chips) have come from tiny firms.

What I think should have happened (and what I would like to see happen in the future) is for the U.S. government to make the kind of investment in energy independence that it has made in the Star Wars missile shield.  I think a case that can be made that freeing the United States from the reliance on oil from hostile nations stands a better chance of protecting us from our enemies than does an unreliable missile shield.  

I’m not a conspiracy buff.  I have no opinion on the notion that the U.S. is fighting in Iraq and Afghanistan to protect our oil.  Similarly, I have no real evidence that any car company has ever knowingly suppressed any technology that would have revolutionized the automobile, nor any oil company quashed a miraculous fuel saver.  All of these things may have happened.

The one thing I’m sure hasn’t happened is a burst of leadership and vision that can wean my country from its oil supply.  It’s matter of national security, and I hope to see it in my lifetime.

My investing idea for today goes back to the Simplified Cabot Market Timer I wrote about above.  It’s also a simple idea, but it should do well for you as the market deals with a stagnating economy and takes the measure of the new administration.

This idea is this: When you get a buy signal from the Market Timer, take a position in the iShares S&P 500 Index exchange traded fund.  You can pick either the S&P 500 Index (IVV) or the S&P 500 Growth (IVW), if you’re feeling a little more aggressive.  Either one will gain you broad exposure to large-cap stocks that represent every sector in the U.S. market. 

If the Simplified Cabot Market Timer turns negative on you, all you need to do is sell the iShares ETF and move back into cash.

While this investment idea doesn’t have the giant upside potential of individual stocks, I can virtually guarantee you that it will beat the performance of the broad market, which is all the managers of most of your 401(k)s and IRAs are trying to do anyway.

Sincerely,

Paul Goodwin
For Cabot Wealth Advisory

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