Glossary of Terms Frequently Used in Cabot Publications
Here is a list of terms that appear frequently in Cabot newsletters. If you don't see a term here that you'd like explained, send us an email at customer service@cabot.net or leave a comment on our blog, http://www.iconoclast-investor.com.
ADRsCabot China & Emerging Markets Report recommends stocks that trade on U.S. exchanges as American Depositary Receipts (ADRs), which are dollar-denominated stock equivalents. This avoids any currency risk and gives investors the protection of knowing that the listed companies have met U.S. accounting and reporting requirements.
BRICThe BRIC countries are Brazil, Russia, India and China, and we often refer to the acronym when writing about the emerging markets.
Cabot TidesFor the 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.
Cabot Trend LinesThe 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.
GapsGaps occur when a stock begins a new trading day at a price that's vastly different from the previous day's closing price. In effect, there is no trading at prices between the closing price and the opening price. This appears as a "gap" on a price chart. Generally speaking, gaps up are considered positive and gaps down are considered negative. However, in many (but not all) cases, price gaps get filled. So if a stock gaps up, you might expect that at some time in the future (from minutes to months later) the stock will drift back down into the gap. Conversely, if a stock gaps down, it's likely to bounce back up to fill or partially fill the gap. Gaps typically offer support or resistance. If a stock gaps down, the gap will offer resistance if it attempts to recover. A gap up will provide support when the stock corrects.
Graham, BenjaminThe father of value investing, his system is used in Cabot Benjamin Graham Value Letter to determine the best undervalued stocks in the market. Graham wrote "Security Analysis" and "The Intelligent Investor," which laid out his value investing system and have become the go-to books for value investors in the decades since their publication. Graham also taught Warren Buffett at Columbia University.
Livermore, Jesse L. A quote from Livermore ("Markets are never wrong; opinions are.") adorns our fireplace at the Cabot office and is referred to frequently in our newsletters. Livermore is one of the most colorful, flamboyant and respected market speculators of all time. Livermore wrote the book, "How to Trade in Stocks," in 1940, which gives
step-by-step guidance on reading market and stock behaviors, analyzing market sectors, market timing, money management and emotional control. Livermore is the subject of the book, "Reminiscences of a Stock Operator"
by Edwin Lefevre, considered a must-read classic on investing.
Market timing indicatorsCabot has three proprietary market timing indicators that we employ to determine when to get in and out of the market, the Two-Second Indicator, Cabot Tides and Cabot Trend Lines.
OptiMoThe Cabot proprietary stock picking system that helps Editor Michael Cintolo determine which stocks will be chosen for Cabot Top Ten Report. It screens for the strongest momentum charts out of more than 8,000 each week.
Relative PerformanceMomentum analysis of a stock's relative performance (RP) is one of our favorite ways to measure a stock's health.
RP measures how a stock is performing relative to a specific market or index. A stock that holds its value during a declining market often soars once the market turns higher. In a strong bull market, most stocks will rise, even the stocks of weak companies. But you should concentrate your efforts on the best companies with the strongest stocks, the market's leaders. The way to find them is by analyzing RP lines. Specifically, RP is calculated by dividing the Friday closing price of a stock by the Friday close of an index. (We use the broad Wilshire 5000.) The weekly changes are then plotted on a line graph, using a log scale. When an RP line is moving upward, the stock is outperforming the market. When it's moving downward, the stock is underperforming the market. A flat RP line indicates the stock's performance is equal to the market's performance.
SNaCSnaC is Paul Goodwin's unique way of determining whether a stock is a good buy. Story includes the basic market proposition of a company, including its products, its target consumers, its potential for huge sales growth, its barriers to entry, its competition, its intellectual property, its management and all the other stuff that you can put into words.
But a good story isn't enough. A stock also must have good numbers, which are a factual record of a company's (and thus, management's) success. Paul looks for stocks that have been growing revenues and earnings for a number of quarters, ideally with earnings (profits) rising faster than revenues (sales). Paul likes to see the rate of growth for both categories accelerating. It's also nice to have an increasing number of institutional investors and an after-tax profit margin that's high and rising. And finally, Paul wants a stock that's liquid—trading at 400,000 shares a day or more—so Cabot subscribers can trade without being worried that the stock will get deep-sixed by one money manager who wants out.
Charts are where the rubber meets the road in growth stock investing. Some highly technical investors don't even care what a company's product is or how much money it's been making. They think they can tell everything they need just from a stock's chart. Paul isn't that confident, but he knows that a stock with a rising price and good volume support must be doing something right.
Two-Second IndicatorThe Two-Second Indicator is so named because that's how long it takes to read: Just two seconds, every day. Specifically, this indicator measures the number of securities on the NYSE reaching new annual (52-week) price lows on any given day. This data is readily available in most major newspapers, though we use the data from The Wall Street Journal.
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