On Calling the Market Bottom
By
Paul Goodwin
, Analyst and Editor, Cabot China & Emerging Markets Report
From Cabot Wealth Advisory 2/21/08
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If
you've ever seen a kid on a grade school playground getting ready to
start jumping rope while two friends swing the rope, you've probably
noticed that some people just hop right in and start jumping. Others
take a little more time.
These people sway forward and backward in sync with the rope, trying to figure out the exact right moment to jump in.
By
a strange coincidence, that's exactly what some investors do when
trying to figure out when to get back into the stock market after a
rough patch. I'm going to try to give them (and maybe you) some tips
about how to do it right.
Intellectually, everyone knows that
the right time to get into the market is at the bottom. Stocks are
cheap and there are bargains galore.
Unfortunately, figuring out
when a bear market is going to bottom is about as easy as knowing when
a long-winded speaker is going to quit talking. It can't be done.
Speakers can always find something else to say...and markets can always
go lower.
Maybe it's fairer to say that you can't see a market
bottom by looking forward through the windshield. It's something that
can only be seen in the rear-view mirror.
That's because,
while neat, clean V-shaped recoveries have been know to occur, market
bottoms are usually a messy process, with hopeful rallies followed by
sickening dips and stocks that look like new leaders losing momentum
quickly.
As the sage Yogi Berra taught us, "It ain't over till it's over."
But
how do you tell if it's over? The Cabot way is to follow a basket of
indexes and wait until a majority of them rise above either their 25-
or 50-day moving averages and those averages begin to trend up.
It's
a simple idea that uses the power of trailing averages to distinguish a
true shift in market direction from the many exciting-yet-fleeting
blips that occur during a downtrend. And it's powerful enough to make
the Cabot Market Letter--Cabot's flagship publication--one of the most
effective market-timing advisories in the newsletter business.
Market
bottoms scare people and make them want to run away from stocks as fast
as their legs will carry them. And when the fear is at its chilling
peak and the maximum number of people have run away, that's when the
market bottoms.
That--as the craftiest investment veterans
will tell you--is the absolute best time to be strolling in the front
door of the market and reaching for your checkbook.
While no one
can reliably call a market bottom, the
Cabot Market Letter can give you
a reliable green light to get back into the new bull market while most
individual investors are still hiding under the covers and trying to
heal up from the beating they took when the bears took over.
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