By Paul Goodwin, Editor of Cabot China & Emerging Markets Report
From Cabot Wealth Advisory 5/20/10 Sign up for free Cabot Wealth Advisory 

"The race is not always to the swift, nor the battle to the strong, but that's how the smart money bets."--Damon Runyon

Like most really good quotations, Damon Runyon's memorable reworking of Ecclesiastes 9:11 exists in a bunch of different versions. It's one of my favorites in the cynical, wised-up style, taking an original bubble of sentiment that basically says, "You can do anything!" and puncturing it with a jab of common sense.

Runyon was a sportswriter and a lifelong gambler, so his use of "smart money" was no accident. The slightly shady characters he wrote about--the ones that formed the basis for the musical "Guys and Dolls"--all wanted to believe that they were savvier and more clued-in than the average mark, square or schmo.

Well, wouldn't we all. There are lots of people who want to be right even more than they want to be rich.

If you're one of them, today's your lucky day, because I'm going to give you one rule that will allow you to gain a reputation as a very savvy individual indeed.

Here it is. In just 10 words.

Market goes up, get in. Market goes down, get out.

Those words are the basis of the Cabot market timing philosophy, an approach that has won the Cabot Market Letter a spot near the top of the list for all market timers. It's also the basis for the Cabot China-Timer, which I use in writing the Cabot China & Emerging Markets Report. And which helped Cabot China & Emerging Markets Report land in the #1 spot on Hulbert's list of the top financial newsletters for the last five years.

You wait for the market to go up before getting in for the same reason sailing ships wait until the tide is going out before they leave port. It's also the reason people who want to go up step on the up escalator rather than the one going down.  

Of course it's still possible to find advancing stocks when the markets are going down. If you had bought stock in the biomedical company Amgen (AMGN) in March 2008 at 39, you could have sold it a year later, when the market bottomed, at 52. But believe me, with the S&P 500 Index plummeting from 1342 to 667 (a 50% drop, which is the equivalent of a haircut that stops at your beltline) during the same period, it was anything but easy to find winners at the time.

So why am I telling you this? Two reasons. First, it's because the tide of the market is now against us. We had a correction from January 19 to February 5 that dropped the S&P 500 by 9.2%. Then came a nearly 17% rally from February 5 to April 26 that pulled even more money into the market. The correction that began on April 27 has now (as of May 19) trimmed 8.8% off the S&P 500 from that April high and dropped it below its 25- and 50-day moving averages.

Translation: Escalator going down. Time to sell all but your strongest stocks and curtail new buying.

But the second reason is even more important. It's that this market correction will continue until it wrings out enough hot money, dumb money and worried money from the market. And at that point, there will be an entire smorgasbord of attractively priced stocks available to those who can recognize a new leg of this bull market in its infancy.

Just as getting out of a down market saves your money, getting into a new up market makes you money. And Cabot's growth disciplines will tip you off about the new bull market buy signal while the dumb money is still groaning and holding its head, wondering what hit it.

So there you have it, a recipe for smartness in just 10 words. Market goes up, get in. Market goes down, get out.

And if you'd like to have a trustworthy advisor to tell you which way the escalator is running (and when it changes), a no-risk trial subscription to Cabot Market Letter will make sure you stay smart.

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