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One Simple Rule that Can Save Your Portfolio

This week, I’m jumping on the “one simple rule” bandwagon that seems to be sweeping the Internet to give you an investing idea that can save your portfolio when things get stormy.

One Simple Rule that Can Save Your Portfolio
Hint: Market Indicators Help You Out
A Stock that’s Flying High


This week, I’m jumping on the “one simple rule” bandwagon that seems to be sweeping the Internet to give you an investing idea that can save your portfolio when things get stormy.

I know that this will seem like a radical idea, because investment advisors have been telling us for years that 1) you can’t time the market, 2) it’s not possible for an individual investor to beat the market (the Efficient Market Thesis) and 3) accordingly, a widely diversified buy-and-hold strategy is the only one that makes sense.

You should recognize this argument, because it’s one that most financial advisors and virtually every mutual fund company stresses. “Have exposure to every sector (so if one sector goes down, another will go up). Don’t mess with your allocations. Just keep throwing money in.”

That’s a lot to take on, but I’m only going to tackle one small corner of it today, and that’s the idea that it’s impossible to time the market.

To start, I have a question for you: If you thought the market was headed down, how long would it take you to clear your portfolio and go to cash?

Think about it. If you were convinced that stock markets were entering a bear phase, and you wanted to get out of your S&P 500 index funds, how long would that take you?

Personally, given my concentrated stock portfolio, I could liquidate all of my holdings in under five minutes, including the time it took me to log on to my online broker.

I know. I’ve done it.

One reason big fund managers say you can’t time the market is that THEY can’t liquidate their portfolios. In the first place, their investment guidelines require them to be heavily invested in the securities described in the fund’s investment prospectus. And in the second place, even if they could go to cash, their enormous investment positions would require months to sell without incurring huge losses as their sales drove prices down.

So one big advantage that you have over big investment funds is that you can get out of the market any time you want. And you can do it almost instantly.

So here’s the rule: Any time the S&P 500 Index drops below its 50-day moving average and the average turns down, you sell. And you stay in cash until the Index rises above its 50-day moving average and that moving average is trending up.

When the S&P 500 (the most widely used proxy for the market) is headed up, you own it, gaining exposure to stocks. When the Index is headed down, you sell your broad equity exposure and go to cash.

On average, you may have to buy and sell your S&P index funds a few times per year. But if you do this, your gains can be substantial.

As an example, here’s what it would have looked like if you had followed this one simple rule and exited your S&P index funds when stocks fell in 2008.

S&P 500 Index Chart for 2008 with 50-Day Moving Average

You would have begun the year in cash, and bought your S&P 500 index funds in mid-April when the Index topped its 50-day moving average and the average turned up. You would have sold again in June (at a profit). Even when the Index poked its head above its 50-day in August, the average didn’t turn up, so you would have been out of the market for the entirety of its 2008 meltdown.

It’s not on this chart, but you would have reentered the market in May 2009, and would have stayed in all year, not selling again until late January 2010.

In 2008, when the S&P 500 Index was going through a disastrous drop from 1,468 to 903 (a 38.5% haircut), you would have lost nothing. That’s leaving out the potential small gain in April and May.

Cabot has worked for decades to perfect our market timing indicators. We have short-, medium- and long-term indicators that involve a mix of sector indexes, averages and new highs and lows.

These indicators work because they don’t try to predict what the market is going to do. No one can do that consistently and accurately. Rather, they allow us to eliminate most of the noise in the market data and identify the actual trend of the market.

Using the one simple rule I’ve given you, you can do the same thing.

If you have friends who got slaughtered during the bursting of the Housing Bubble and the subsequent market meltdown—or missed the profitable upmoves since—this would also have given you some interesting bragging rights when you were swapping investment stories.


Airline stocks are a bit hit or miss right now, but JetBlue (JBLU) is clearly the leader and remains in a firm uptrend. Here’s what Mike Cintolo, Chief Analyst of Cabot Top Ten Trader wrote about JetBlue on May 4:

Why the Strength

JetBlue is an unusual airline stock. Like others in the industry, it has benefited from the recent dip in fuel prices, but the regional passenger carrier service has something that many of its peers don’t: reliable fundamental strength. JetBlue may have taken a hit when oil was expensive, but it bounced back vigorously when oil began to fall, and now has put measures into place to minimize losses in the event of a sudden oil price increase. JBLU gapped up on strong earnings growth—a 10.4% increase in revenue passengers, a 3.4% increase in average fare, an additional $178 million in revenue—but that isn’t the whole story. Don’t let the nervous excitement of earning season muddle the issue: JBLU has been breaking long-term highs since 2013. It is the perennial favorite and industry leader in the ACSI Customer Satisfaction Index, and has enjoyed several analyst upgrades in 2015. Although the earnings gap is important and reminds us that JBLU still has some room to grow, the airline’s consistency and fundamental strength are what keep us interested.

Technical Analysis

2015 has been kind to JBLU. The stock began the year at a 10- year high, dipped a little bit in early January, and then powered into an uptrend that it has remained in place since. There have been moments of slower growth—it unsuccessfully pushed at its resistance around 20 for the better part of April—but for the most part, JBLU has been in a solid, even-paced uptrend since it broke long-term resistance in late 2013, and the ability to maintain a steady uptrend while confidently hitting new highs is exactly the kind of thing we like to see in Top Ten.

You could buy JBLU here and watch it carefully, or you could subscribe to Cabot Top Ten Trader and Mike will give you his buy range and loss limit, and follow up with you twice a week. For more information, click here.


Paul Goodwin
Chief Analyst, Cabot China & Emerging Markets Report
And Cabot Wealth Advisory

Paul Goodwin is a news writer for Cabot’s free e-newsletter, Wall Street’s Best Daily.