Cabot Market Letter Goes Fishing
Commentary: Successful letter takes contrarian tack
By Peter Brimelow, MarketWatch
July 22, 2010
NEW YORK (MarketWatch) -- A successful market timer announced it was putting “a line back in the water” last week. And it’s still there, despite some wild waves.
Cabot Market Letter wrote in its issue published July 14: “We are once again at a moment of truth, and the questions are these: Is the May-June downtrend still intact, and the rally of the past two weeks just a fake-out? Will the market downtrend resume and take us down to the traditional September-October bottom? Or is that too obvious and expected?”
“We have no preconceived notions, though we are optimistic, precisely because so many people are pessimistic—an understandable position given the national and global economic conditions.”
“Our Cabot Tides flashed a buy signal today (the first time the indicator has been positive since early May), so it’s time to put a line back in the water. In the Model Portfolio, we’re buying Acme Packet (APKT) and Rovi Corp. (ROVI), bringing our cash position back down to about 50%. If we develop profits, we’ll be looking to put more money to work.”
“Cabot Tides” is Cabot’s name for its intermediate indicator, based on the action of five different indexes.
This move was a bold one, because Cabot’s long-term indicator is still bearish. And it hasn’t worked, yet, because July 14 turned out to be the market’s recent high.
But Cabot’s market timing is one of the letter’s strengths. According to the Hulbert Financial Digest, it is one of the few services to have beaten a buy-and-hold on a risk-adjusted basis over the last 15 years. It combines market timing with a disciplined stock selection system using fundamental and technical factors.
Cabot was one of the first letters to recognize the post-2002 bull market—and to bale out in late 2007. More recently, it was bravely bullish in 2009. ( See June 18, 2008, column.)
This hasn’t translated into the spectacular gains Cabot enjoyed in some years of the last decade, but it’s still not doing badly.
Over the year to date through June, Cabot’s Model Portfolio is down 5.2% by Hulbert Financial Digest count—a little better than the dividend-reinvested Wilshire 5000 Total Stock Market Index’s negative 5.8%. Over the last 12 months, Cabot was up, but less than the total return Wilshire 5000, 5.7% vs. 15.7%.
Over the past three years, however, Cabot achieved a 0.6% annualized gain—which may not sound much but is much nicer than the negative 9.4% annualized of the total return Wilshire.
Over the past five years, the letter has achieved a 3.4% annualized gain, versus a negative 0.3% annualized for the Wilshire.
Editor Michael Cintolo always makes a clear and rational case—which doesn’t necessarily get you anywhere in the market, but which appeals to me anyway.
Recently, discussing his “Watch List” of stocks that he might recommend but hasn’t yet (with the result that the Hulbert Financial Digest doesn’t count them), he wrote:
“One of our favorite methods is to look for stocks that are ‘in gear’ with the market, but are showing a distinct positive divergence over a number of weeks. For instance, take a look at the chart of the SPDR S&P 500 ETF (SPY) and notice that, since the top in mid-April, there have been four distinct low points.”
“Now, knowing that pattern, you can inspect individual stock charts for the opposite pattern ... a series of higher lows. If you see a stock that is getting hit when the market does, yet holds up at slightly higher levels after each sell-off, that is valuable information—it’s telling you the stock is trying to move higher.”
“A picture-perfect example of this is Aruba Networks (ARUN), an emerging wireless networker.”
Interestingly, Aruba has withstood the recent stock slide and closed Wednesday at its highest point since January 2009.