Peter Brimelow comments on the May 18 issue of Cabot Market Letter, writing that the top-performing Letter has become cautious of the current market, and is raising cash. In his column entitled, "Top Performing Bull Edging for Exit," Brimelow writes that Cabot Market Letter is "one of the strongest performers since the Crash of 2008, basically by sticking to a brave bullish call made in early 2009." Today, one of Cabot's three market timing indicators is on the fence, but Brimelow attributes the Letter's cautious approach to "instinct and experience."
Reprinted from MarketWatch
Top-performing bull edging for exitCommentary: Cabot Market Letter subtly second-guesses its system
By Peter Brimelow, MarketWatch May 19, 2011
NEW YORK (MarketWatch)—A disciplined top-performing bull edges for the exit—but based on a pretty subtle reading of his system.
When I last looked at Cabot Market Letter, it was sternly warning that petty events, like the Arab Spring and the Wisconsin Winter, made no difference to its investment system, which consists of long-, intermediate- and short-term moving averages and a tight focus, fundamental and technical, on specific stocks. (See March 7 column.)That impressed me. Cabot has been one of the strongest performers since the Crash of 2008, basically by sticking to a brave bullish call made in early 2009. (See December 9, 2010, column.)
Over the past 12 months through April, Cabot is up 36.54% by Hulbert Financial Digest count vs. 18.24% for the dividend-reinvested Wilshire 5000 Total Stock Market Index. Over the past three years, the letter is up 9.22% annualized vs. 2.77% annualized for the total return Wilshire 5000.
And over the past 10 years, the letter is up an impressive annualized 7.08% vs. 3.96% annualized for the total return Wilshire 5000.
Of course, stocks are indeed higher than they were in March. But recently, Cabot has been edging for the exit. Its most recent issue, dated May 18, is headed “Cracks in the Hull.” After pruning its weaker performers, as is its practice, it’s now 52% in cash.
Cabot’s long-term indicator is still bullish. But its intermediate-term indicator, which it calls its “Cabot Tides,” is “on the fence—all five of the indexes we track are within a hair of their lower (50-day) moving average. Thus, the next few days will be telling—a clear sell signal would be a sign that the overall market is entering a corrective phase.”
Cabot says: “As always, we won’t anticipate any signal.” But it’s clearly worried.
Similarly, its short-term indicator, which it calls its “Two-Second” Indicator, has given a warning signal—the first two days of more than 40 New York Stock Exchange stocks hitting new 52-week lows since March’s Japan-jinxed slide.
Cabot says: “Overall, the indicator isn’t pointing to a bear market-type threat, but it is revealing the expanding weakness we’re seeing underneath the market’s hood.”
Cabot is certainly not breaking with its system—it’s only 52% in cash, after all, and it does note that “if the indexes can hold the 50-day lines and leaders find support, the bulls could retake control sooner than most expect. … The overall bull market still looks fine, so whether it’s next week or in six weeks, we expect the bulls to retake control and another round of profit opportunities to present themselves.”
But it is subtly second-guessing its system, at least potentially. This is an example of an adviser’s instinct and experience coming into play.
What particularly seems to be stressing Cabot is simply that the market has gone down—not merely the broad indices, but several of the stocks in its portfolio.
Thus, it just downgraded to a “hold” the Chinese search engine Baidu Inc., saying sadly: “Baidu has been the top-growth stock of the entire bull market, and because we have a huge, longer-term profit (and have already pocketed some profit during the ride higher), we’re willing to give it plenty of rope to consolidate and build a new launching pad. … BIDU has broken its 50-day line, along with many Chinese Internet stocks, and looks like it needs time to repair the damage.”
But Cabot still has hope for Baidu—it writes: “We believe that, when the bull market reasserts itself, this stock has a good chance of once again being a leader, thanks to its still-intact long-term uptrend (the 200 day moving average is at 112) and huge earnings estimates (up 68% this year, and another 50% in 2012).”