Cabot uses three primary market timing indicators in all Cabot growth letters (Cabot Market Letter, Cabot Top Ten Report, Cabot China & Emerging Markets Report and Cabot Global Energy Investor). In addition to these indicators, Cabot China & Emerging Markets Report uses the Cabot China-Timer and Cabot Global Energy Investor uses the Cabot Energy-Timer.
Cabot Trend Lines
The Cabot Trend Lines are our unique way of determining the long-term trend of the stock market. As long as both the S&P 500 Index and the Merrill Lynch 100 Technology Index fluctuate above their respective trend lines, we consider the market to be bullish. If both indexes are below their trend lines, we are in a bear market.
Cabot Tides
We use five different market indexes to help us determine the overall intermediate-term direction of the stock market. They are: S&P 500, NYSE Composite, Nasdaq Composite, S&P 600 Small Cap and the Merrill Lynch Tech Index, an index that equally weights 100 of the leading technology stocks in the market. The market is considered to be advancing on an intermediate-term basis if at least three of these five indexes are advancing. And contrarily, the market is deemed to be declining if at least three of these five are declining.
Two-Second Indicator
The Two-Second Indicator’s specialty is detecting market tops. When the number of daily new lows on the NYSE is greater than 40 while the major indexes are rising to new peaks, look out! It’s telling you that, internally, sellers are in control of most stocks, and the indexes are masking this weakness. However, if new lows expand to greater than 40 after the indexes are five days or longer off their peaks, the Two-Second Indicator is simply telling you the market is entering a correction. This correction could be deep, and thus you should still practice caution. Finally, when new lows are less than 40 day after day, that’s a sign of a healthy, robust market – the buyers are firmly in control of most stocks.
Cabot China-Timer
The Cabot China-Timer is a trailing market indicator that uses the performance of the Halter USX China Index to gauge the trend of emerging market stocks. The China-Timer is considered to be positive when the Halter Index—which is composed of over 90 Chinese stocks that trade on major U.S. exchanges as American Depositary Receipts or ADRs—is above the lower of either the 25-day or 50-day moving average. When the Index falls below both its 25- and 50-day moving averages, the China-Timer turns negative and the Cabot China & Emerging Markets Report adopts a defensive stance. The China-Timer will not be considered as having turned positive until the level of the Halter Index once again moves above either the 25- or 50-day moving average, and that average is itself trending upward. While the Cabot China-Timer is based entirely on the movement of the Chinese ADR market, it is considered to be a proxy for the general level of risk tolerance in investors. If investors are leaving Chinese stocks, they will also be exiting Brazil, Russia, India and the other emerging markets.
Cabot Energy-Timer
Cabot Global Energy Investor uses the Cabot Energy-Timer to gauge sentiment in the energy category and sensibly guide us to when it's advantageous to buy—or not. The base of the Energy-Timer is the iShares S&P North American Natural Resources Sector Index Fund (ticker IGE), which encompasses some oil-focused companies and natural gas firms. It also includes a smattering of gold, silver and copper, which act as fairly decent—if not exact—proxies for the companies which pull lithium, rare earths and palladium out of the ground, elements which are much more directly tied to the business of alternative and clean energy. As with most indexes, the IGE is imperfect (for one, it is too heavily weighted toward major oil companies), so we use it as a telltale, but not a harbinger, of the sector's direction.
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