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An Unprecedented Market? Hardly.

The message I have for you today is this: Make sure you have a system—or a well-thought-out plan—and follow it, no matter how unusual/scary/crazy the world gets. Cabot Growth Investor has a great system (plug alert!), but I don’t pretend to have the Bible when it comes to investing. What’s most important is that you stay grounded and follow sound principles that work year after year. Don’t overreact to the latest blip up or down in the market.

Happy Anniversaries!

It’s Happened Before

Following All the New Market Leaders

Happy Anniversaries!

I’ve always been interested in modern history; I remember making mincemeat out of The Second World War, an 880-page manifesto of all the tactics, heroes and horrors of that period. And when I started at Cabot back in 1999, I put that interest to work in the market, reading every issue of Cabot Market Letter (now Cabot Growth Investor) on my lunch breaks … about 690 issues in all.

So today I want to lead off my Wealth Advisory by mentioning two anniversaries that just passed. The first was for Cabot itself—we got our start back on October 12, 1970 with the first issue of Cabot Market Letter titled, “It’s Time to be an Optimist.” So last week (Columbus Day, actually) marked our 45th anniversary. Hurrah!

But this week brought another anniversary of an event that will live in infamy for decades to come—the 28th anniversary of the 1987 stock market crash, aka Black Monday. The Dow fell 508 points that day, a decline of 22.6% on the day. Mind-boggling!

It’s Happened Before

As a student of history, of course, I wanted to read all I could about that time period, and the archive of 1987 Cabot Market Letters was the first book I pulled out. And it turned out, we handled it well! Our market timing indicators actually turned negative way back in April (interest rates, which were key back in those days, began trending up), and we advised subscribers to begin building cash. The indexes topped out in August, and by October, we had subscribers playing defense.

Here’s what Carlton Lutts wrote in the Letter dated October 16, the Friday before Black Monday. The issue was titled “Remain in Your Storm Cellar!” and here’s his key paragraph from page 1:

“The fashion these days is for analysts to talk about the volatility and selectivity for the ‘last phase of this bull market.’ They talk about the coming market advance to Dow 3,600 after the current ‘correction.’ This is just what you should expect at the beginning of a bear market … lots of reassurance that ‘this bull market still has a long ways to go.’ We’ve been through plenty of bear markets since 1949, and we should know!”

The rest is history—the market crashed the following Monday, and after a bottom-building process for a few weeks, we turned bullish in early December (the title of the December 11 Letter was “Climb Onboard this New Bull Market”) in time for the market’s rally the following year.

By now, some of you are probably wondering whether I’m recounting all of this about 1987 because I see another crash around the corner. Don’t worry—I don’t. In fact, I received an intermediate-term buy signal in the first week of October, causing me to do a little buying for the first time in a couple of months (more on that below).

But I’m writing about 1987 to reinforce the viewpoint that, in the market, there’s really nothing new under the sun. I regularly receive questions like “Have you ever heard of a market as crazy as this one?” or “Who can tell what will happen with all the crazy things going on in the world?”

My general response: While today’s environment might seem unprecedented, it’s not. Heck, there is no more extreme situation than what happened in 1987, right? And yet the market played out similarly to past panics, thus allowing us to stay on the right side of the major trend.

Obviously, in the real world, there’s never been quantitative easing, nor such a lack of confidence in government, nor this much money in junk bonds, etc. But the stock market is governed by human beings making decisions, with all the emotions that go into that—and human nature hasn’t changed despite everything else that has.

The upshot of all this is that if you have a proven system, you can succeed in any environment ... even those that seem one-of-a-kind. Our (relatively simple) methods of timing the market—mostly trend following, some broad market analysis and watching potential leading growth stocks—have kept us on the right side of the market’s major trend for 45 years, and I have no doubt they will for years to come.
The message I have for you today is this: Make sure you have a system—or a well-thought-out plan—and follow it, no matter how unusual/scary/crazy the world gets. Cabot Growth Investor has a great system (plug alert!), but I don’t pretend to have the Bible when it comes to investing. What’s most important is that you stay grounded and follow sound principles that work year after year. Don’t overreact to the latest blip up or down in the market.

As I wrote above, my Cabot Tides (which focus on the market’s intermediate-term trend) turned positive on October 7 after a few weeks of negative readings, which was a big reason I was in a defensive stance for the past two months. Moreover, the broad market—which actually topped in early May, way before the indexes—is looking much better.

So are we out of the woods? Well … I’m not sure yet. From a longer-term perspective, my measures still tell me the trend is down (or, at best, sideways), and, so far, growth stocks have just been so-so—many have set up in nice launching pads, but just about any stock approaching new high ground has been met with selling pressures. Conversely, most of the action has been in beaten-down sectors (commodities, industrials and the like).

If the market is going to enjoy a sustained rally, I think we have to see some stocks hit new highs and keep running higher. So my game plan is simple: Buy some breakouts if they occur. And if they don’t, go slow.

Following All the New Market Leaders

In the meantime, I’m doing a little new buying in stocks that have either nosed out to new highs and building my watch list in stocks that could lift off on earnings. One to watch is Adobe Systems (ADBE), the well-known leader in digital marketing and publishing tools, whose switch to a cloud- and subscription-based revenue model has gone well. Here’s what I wrote about the stock three weeks ago in Cabot Top Ten Trader:

“Adobe Systems used to be a software company that sold you a blister pack with a CD of your Acrobat, Flash or Photoshop software. These enormously popular programs were mainstays of creative designers for the Web, print or media. But the company has been working hard to convert its users to a software-as- a-strategy to sell its popular products in a package (called “Creative Cloud”) that will smooth out its revenue stream with continuing subscription fees. The company’s quarterly report on September 17 featured a snappy 93% jump in earnings on a 21% gain in revenue. Both the improved EPS and revenue growth rates were the strongest in years, and investors appeared to take the company’s (slightly) disappointing guidance for Q4 in stride. Adobe’s announced intention to become a digital cloud juggernaut looks quite possible, as the company added 684,000 net new subscribers during the latest quarter, bringing its total to over 5.3 million. The company has beefed up its offerings in the past year with a takeover of online stock-photo leader Fotolia in December 2014 and a 3D animation company, Mixamo, in May. Investors like the aggressive moves to augment the product line and the new revenue model. Adobe Systems looks to have plenty of fuel.”

What’s interesting is that, a few days after I wrote this, the company pre-announced lower-than-expected earnings for 2016, causing the stock to fall from 85 to as low as 79 the next day. But that proved to be just a shakeout, as the stock powered right back to new highs near 89 before pulling back a bit this week.

With sales and earnings growth remaining strong for many quarters to come, ADBE should perform well … if the market’s rally continues. I’m not opposed to starting with a small position around here, but your best move is to consider a subscription to Cabot Top Ten Trader, where you’ll find my advice on ADBE and all the other new market leaders that lift off in the days and weeks ahead. Click here to order.


Michael Cintolo
Chief Analyst, Cabot Growth Investor and Cabot Top Ten Trader

A growth stock and market timing expert, Michael Cintolo is Chief Investment Strategist of Cabot Wealth Network and Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader. Since joining Cabot in 1999, Mike has uncovered exceptional growth stocks and helped to create new tools and rules for buying and selling stocks. Perhaps most notable was his development of the proprietary trend-following market timing system, Cabot Tides, which has helped Cabot place among the top handful of market-timing newsletters numerous times.