Market Timing Review of 2009

By Paul Goodwin, Chief Analyst, Cabot China & Emerging Markets Report
From Cabot China & Emerging Markets Report January 14, 2010 

2009 is now in the books, and it was a year of high drama. Investors should have the date March 6, 2009, underlined in their diaries as the day U.S. stock markets completed the retest of their November 2008 lows and put in a definitive bottom. Since the S&P 500 bottomed at 667 on that date, the Index shot up as high as 1,130 (December 29) to register its 2009 high and roared to new highs on Monday, January 5.  

It's worth noting (as I have read somewhere) that the sentiment index of the American Association of Individual Investors hit a record level of pessimism that week of March 6, with 70% of all respondents bearish about the market. It may seem odd that a record reading on pessimism would coincide with the beginning of a major, dramatic market rally, but it's really not. It's one of the commonplace ironies of the universe that things can only begin to improve when they are at their lowest.   

It's also worth noting that the Cabot Market Letter's Cabot Tides, the Letter's intermediate-term trend indicator, turned positive in the March 25 issue and the long-term Cabot Trend Lines flashed a buy signal on April 8.

Cabot China & Emerging Markets Report got a buy signal on March 23, just a little over two weeks after the U.S. market hit bottom.

After remaining more than 70% in cash for months during the big decline, both publications used their buy signals to begin moving back into the market in a month or less after the market bottomed.

When these two publications produced their new buy signals, investor sentiment was a dark blend of pessimism, fear and anger. For most investors, the idea of putting money back into a market that had just taken a monster six-month bite out of their portfolios was totally insane.

But the buy signals were valid. They gave lots of people the confidence to get back into the market while sentiment was still dismal. And those people made money, which is ultimately what Cabot is all about.

With markets wobbling recently and China—the main engine for much of the world's growth in 2009—in a short-term correction, the value of Cabot's market-following timing indicators is especially important.  

Investor sentiment is totally rosy right now, with nary a cloud in the sky.  

In the contrary world of the stock market, that means a correction is currently possible, and eventually it's inevitable. When markets have been hot for long enough, a cool-off is always on the agenda.  

It's the timing that's the problem.

Most investors remained pessimistic for months after the markets turned up last March. And they will remain optimistic for a long time after the anticipated correction begins, whenever that is.

But the Cabot market timing indicators are always totally objective. They don't get emotional; they don't know a thing about optimism or pessimism.

They just tell us, and our subscribers, what the trend of the market is.

Cabot's market timing indicators get us into the market when it's heading up and out of the market when it's in a bearish mode. And given how long it takes investor sentiment to come around after either the bulls or bears have been in charge for a while, that's a genuinely valuable service.

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