MarketWatch Gives Update on Market Letter Stance


Excerpt from MarketWatch May 10, 2012

Bear, bull, both decline to bale

Commentary: Two very different letters holding firm
By Peter Brimelow, MarketWatch

Sixth down day for stocks—but two very different letters are not yet ready to bale.

I named Dennis Slothower’s Stealth Stock Daily (SSD) Letter of the Year in 2011 because of its brave bearishness, which at that point looked prescient, especially interesting because exactly the same turn-calling courage kept Stealth Stocks clear of the 2008 Crash—which counts for a lot.

That bearishness didn’t work out—at least, not yet—and SSD is now a cautious 20% invested. It wrote last night:

“The stock market is now getting oversold on a short and intermediate-term basis, with the major indexes now testing some rather key support levels. So, my guess is we are about to hear from the Fed and some serious jaw-boning about another bailout very soon, given the risk exposure even U.S. banks now have in Europe.

“…But if we don’t hear from the Fed about another bailout soon and Europe continues to worsen we could see a test of the bottom... near the S&P 500 Index. October highs at 1292. The bulls have to hold it or it can get really ugly here, given how weak market breadth is.”

In contrast, the veteran Cabot Market Letter was a successful bull both after the 2002 lows, baling out farsightedly in 2007, and from early 2009.

This worked very well for Cabot, despite scary moments, until last year. See March 15, 2012 column.

Over the year to date through April, however, Cabot seems to be getting back on track. It is up 10.7% by Hulbert Financial Digest count vs. 11.96% for the dividend-reinvested Wilshire 5000 Total Stock Market Index.

Cabot did lose 7.93% over the past 12 months vs. a 3.47% gain for the dividend-reinvested Wilshire 5000. And over the past three years, the letter gained only an annualized 13.85% vs. 19.8% annualized for the total return Wilshire 5000.

But over the past five years, the letter was up an annualized 10.89% vs. just 1.33% annualized for the total return Wilshire 5000. Indeed, over the past fifteen years, the letter is up an impressive 8.02% annualized vs. 6.18% annualized for the total return Wilshire—a difference that really compounds.

That’s why I call Cabot a veteran letter.

Cabot is currently about two-thirds in stocks—it commented ruefully last night:

“Obviously, when stocks are taking hits, you always wish you had more cash, but we’re glad to have had at least a third on the sideline during the correction. From here, we think it’s best to take it on a stock-by-stock basis; try to hold on to your resilient names, but don’t hesitate to get out of your weakest holdings.”

But Cabot still isn’t baling. It said last night:

“Overall, the evidence still points toward this being a correction within a general bull trend, not just because of the Cabot Trend Lines [a proprietary indicator], but also because most leaders, while certainly taking on hits, haven’t shown the type of huge-volume meltdowns often seen near major peaks.”

Cabot cautions:

“Does that mean the market can’t fall apart? Of course not — the future isn’t written in stone, so you shouldn’t misinterpret our longer-term optimism as an excuse to be complacent.

 “However, it is best to go with the evidence…right here, remember that the odds still favor higher prices down the road; it’s certainly possible this week’s panicky action is bringing us close to some sort of low.”

Macro-intriguingly, Cabot also comments:

“We are very encouraged by the action of Lennar Corp. (LEN) AND other homebuilding and housing stocks. It looks like many of them consolidated for a couple of months (mid-February through mid-April) before lifting off last week. And LEN and others have held up well during the latest market slide; LEN was close to a new closing high today! If you don’t own any, consider taking a small position around here or on a dip of a point or so. BUY.”

Link to full story on MarketWatch:

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