MarketWatch on Market Letter: Unexpected events occur frequently

MarketWatch quotes Cabot Market Letter's advice that “unexpected events occur frequently”—so ignore them and focus on your investing system. Market Letter Editor Michael Cintolo is quoted saying that now is the time to “rid your portfolio of your losers and laggards, hopefully during bounces. You should also cut back on most (though not all) new buying for now."


Reprinted from MarketWatch

Disciplined bull says ignore unexpected events

By Peter Brimelow, MarketWatch March 7, 2011

NEW YORK (MarketWatch)—A top-performing letter says “unexpected events occur frequently”—so ignore them.

The Cabot Market Letter was one of last year’s Top 10 letters. (See Dec. 27, 2010, column.) It achieved this basically by turning bravely bullish in early 2009. (See Dec. 9, 2010, column.)

But before that, Cabot endeared itself to me by being one of the first letters to recognize the post-2002 bull market—and one of the first to disengage from it. (See Jan. 10, 2008 column.)

In its latest issue, Cabot said: “The Arab world is in revolt, as one long-term authoritarian regime after another is toppled by the power of the people. Gasoline prices have shot up, renewing memories of gas at $4 per gallon and kindling fears of $5. Wisconsin—so recently the scene of football-centric celebrations—has become the main battleground in the fight to reduce the power of government unions in the quest to shrink budget deficits. And pirates in Somalia continue to do their thing.

“All of which has absolutely no relevance to our investing system…”

This is true. Cabot’s disciplined system consists of short- , medium- and long-term indicators based on moving averages; and a tight focus, fundamental and technical, on specific stocks, retreating to stronger performers when times warrant.

Like now. Cabot wrote late last week:

“Our market timing indicators are technically positive, but the Cabot Tides [medium-term indicator] are on the fence, and most leading stocks are taking hits. It’s not a reason to bail out, but selling losers and laggards and holding some cash is prudent. Tonight, we’re selling General Motors Co., which hasn’t been able to bounce of late, and placing Nvidia Corp. on hold.”

The latter is particularly significant. In its monthly letter just a few days ago, Cabot devoted a special section to chip maker Nvidia, saying, “We think Nvidia has a shot to take Intel’s crown. … While the stock is very volatile, we think it has huge potential if management makes the right moves.”

Other recent sales include Rovi Corp., ProShares Ultra QQQ and Google Inc.

Cabot’s comment on Google further illustrates the letter’s method:

“Google has also been lagging the market, and our patience has run out. All the news surrounding the firm’s Android software, as well as the general pickup in online advertising, has failed to boost the stock despite the bull market. Now, with the market showing renewed signs of wear and tear, Goggle has slipped beneath its 50-day line. It’s not terrible, but we’d rather sell this laggard and hold the cash.”

Before selling General Motors, Cabot was 33% in cash.

Cabot’s conclusion:

“Be sure to rid your portfolio of your losers and laggards, hopefully during bounces. You should also cut back on most (though not all) new buying for now. But we don’t think it’s time to jettison all your profitable stocks, or to totally hide out in the storm cellar.

“All of the above refers to the short-to-intermediate term. Looking at the longer term, we see no signs that the market is at the front-edge of a real bear phase.”

It’s working. Over past 12 months through January, Cabot is up 42.1% by Hulbert Financial Digest count versus 24.18% for the dividend-reinvested Wilshire 5000 Total Stock Market Index.

And over the past three years—including the Crash of 2008—the letter is up 9.33% annualized versus 3.09% annualized for the total-return Wilshire 5000.

Indeed, over the past 10 years, the letter was up an annualized 6.65% versus just 2.33% annualized for the total-return Wilshire 5000. That adds up.

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