The Role of Market Timing

by Michael Cintolo on April 16, 2014

This is an excerpt from Cabot Market Letter, where we’ve been picking the best growth stocks since 1970. Cabot’s flagship advisory combines expert stock selection and award-winning market timing. This is the most complete, and most helpful, growth-oriented investing advisory available at any price.

When this advisory service debuted in October 1970, the timing was not random; it was calculated. Our founder, Carlton Lutts, had delayed publishing until his market timing indicators turned positive, reasoning that a track record that started early in a new bull market would help sell subscriptions. And in a sense he was right; that 1970-1972 bull market brought his initial readers gains of 44% in Lubrizol, 56% in Maytag, 60% in Crown Cork & Seal, 68% in Ford Motor of Canada and 164% in Kaufman & Broad (now KB Home), and by touting those profits as time went by, he slowly attracted more subscribers.

Unfortunately, a market bottom is the worst time to start an investment advisory if you’re trying to get new customers, because at market bottoms, investors are fearful. They don’t want to invest! So while the initial investments performed well, which was good for the business’s long-term fortunes, interest among investors was extremely low, which was not good for cash flow in the early months.

The opposite strategy, launching the publication at a market top, would have brought cash in faster, but the early customers would have lost money in the bear market that followed, and that wouldn’t have helped anyone, so in retrospect, Carlton was pretty smart. And the business, obviously, did survive and eventually thrive.

And what does this have to do with today? Well, a month ago, the market topped out and began a correction of some sort. When the correction began, investment sentiment by our measurements was “giddy.”  People had become accustomed to a market that gained ground every month. They had learned that buying dips brought more profits. And it was pretty easy for us to get new customers!

Now, after a big decline in growth stocks that has begun to spread to the rest of the market, our Cabot Tides have turned negative. This doesn’t mean it’s time to head for the hills—in fact, our other two market-timing indicators are still positive; you can see the details on page 6—but it does mean it’s time to be more conscious of market risk, because the easiest part of the 2013-2014 bull market is over.

From here, anything is possible. We might get a rally that restores hope, especially among investors still holding those old market leaders, and then dashes those hopes as the correction resumes. We might get a move to new highs by new leaders—see our comments on page 5 about commodity stocks.  Or we might simply get a basing period that rewards nobody in the near term, but sets the stage for a renewed but more selective advance among growth stocks.

The fact is that no one knows what’s coming next; the market will always do its best to fool the majority of investors. But by watching the market carefully, monitoring our indicators, and following the tried-and-true rules—not the least of which is to cut losses short—success can and will be achieved. We’re happy to guide you on the road there.

Michael Cintolo is Vice President of Investments at Cabot Heritage Corporation, and Chief Analyst of Cabot Market Letter and Cabot Top Ten Trader. A growth stock and market timing expert, Mike is a true student of the market and a technical analysis specialist.

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