MarketWatch Quotes Cabot: "The Future is Bright"

Reprinted from MarketWatch

Dow 14,000 in 2011? Battered Bulls Feel Vindicated
Commentary: Two letters say history show current pessimism is misplaced

By Peter Brimelow, MarketWatch
Sunday, August 2, 2010

A jagged July ends positive, and two battered bulls feel vindicated.

First, a proprietary word: The Hulbert Stock Newsletter Sentiment Index (HSNSI) — which the reflects the average equity exposure among a subset of the short-term market timing newsletters tracked by the Hulbert Financial Digest — stood on Friday night at 35%, down from 47.5% on Thursday.

Earlier this month, Mark Hulbert argued that the HSNSI's relative slow response to the market rebound off its July 2 low was bullish from a contrary point of view.

Stocks are indeed slightly higher now, but so is the HSNSI. Mark Hulbert regards the current reading as sliding back from positive toward neutral — over the next few months.

In contrast, recently I looked at two bullish letters that were being battered by July's cross currents. Both have updated as the month ended strongly — and both feel vindicated.

Sound Advice has distinguished itself by heroically turning bullish in very early 2009 and remaining bullish through every local difficulty since then. But this summer's slump left it queasy, though still buying.

On Friday, Sound Advice seemed well recovered, although its reasoning was still rather grim: It thinks the economy might well be headed into a double dip — but that might not be the end of the world, or at least of the bull market.

It wrote: "We took a look at GDP numbers for the period since World War II and found that though most expansions begin and continue unabated (1949, 1953, 1957, 1974 and 1990), at least four (1969, 1980, 1981 and 2001) revealed not just slowing after the first quarter of growth but a renewed contraction before gaining enough traction to post successive positive quarters. And in two of those recoveries (1974 and 1990) that did not endure a contraction after the recessionary quarters had ceased, growth decelerated, as it has in this quarter, before the economy took off."

Sound Advice's contrarian conclusion: "Skepticism about the economic recovery continues, and substantial anxiety about the durability of a recovery for stock prices also lives on. With few exceptions, this combination of anxiety usually points to higher prices. If our heretical review of how economic expansions have worked over the last 65 years is confirmed this time around, we should do well."

Cabot Market Letter said in early July that it was "putting a line back in the water." It nearly got washed off the quay. (See July 22 column.) But it's still there.

Its most recent monthly issue, dated July 28, was headed "The Future Is Bright." That's refreshing, eh?

Cabot wrote: "Long-time readers know the best investing environments come when markets strengthen, yet investor sentiment remains negative, and that may describe the current situation to a T. According to the American Association of Individual Investors, investor sentiment was recently at its lowest level since 1987, when its record-keeping began. Yet the market is strengthening! Our [intermediate term] Cabot Tides buy signal remains in effect, and our longer-term Cabot Trend Lines could turn positive at the end of the week."

Cabot is now 65% invested and has added two new buys: Riverbed Technology Inc. (NASDAQ: RVBD) and Inc. (NYSE: CRM).

Cabot concludes with a surprisingly strong (for such a judicious service) endorsement of the venerable "Presidential Election Cycle" theory. It writes: "From the market's low point in the year of the midterm elections (like 2010), to its high the following year (2011), the major averages have averaged a gain of nearly 50%. It's true!" (See excerpt from Cabot Market Letter.)

Based on past performance, it projects: "With a Dow low of 9,687, a rally into 2011 could carry the index well above 13,000 and even to 14,000. It might sound crazy, but history suggests it's not just possible, but likely!"

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