Stepping Aside

We’re starting today’s issue with a few lines from Reminiscences of a Stock Operator (our favorite investment book). Here’s Livermore’s words (via his pen name, Larry Livingston): “I cannot always invest on certainties. I must reckon on probabilities. An old broker once said, ‘If I am walking along a railroad track and I see a train coming toward me at sixty miles an hour, do I keep walking on the ties? Friend, I side-step. And I do not even pat myself on the back for being so wise and prudent.’”

That’s our feeling right now. Following tedious-at-best action during the last month or two of 2015, sellers have come out swinging this year, driving the major indexes toward multi-month lows and taking down most of the growth stocks that had been setting up in recent weeks. That leaves all of our market timing indicators negative and fewer stocks in pole position to lead the next rally.  

So what do we do? We step off the tracks! We had already done that in large part coming into this week (holding a hefty 45% in cash for the past few weeks), and we’ve done some additional selling this week, leaving us with more on the sideline than in the market. Moreover, we have another couple of stocks on tight leashes should the selling continue, which would bolster our cash position further.

Many readers will see that stance and our editorial starting on page 6 titled “Bear Market Survival Guide” and conclude we’re buying canned soup and bottled water and preparing for a replay of 2008. Hardly. Even if this is the kickoff to a bear phase (which is possible), we strongly believe it will be far more garden variety (20% to 25% over a few months) than the prior two. There are no guarantees, of course, but there haven’t been three whopping bear markets in a row throughout market history.

So we’re not considering the full bearish route yet. Although our trend-following indicators are negative, most major indexes are still within the same wide trading ranges we’ve observed during the past year or more. Throw in the countless snapbacks from 5%-ish declines during the past two years (usually just as everyone believes the bears are ready to take control) and a ray of light from our Two-Second Indicator (a positive divergence in the number of new lows this week), and it’s hard to definitively conclude the fat lady is singing here.

But, as Livermore said, you have to invest on probabilities, not certainties. We embrace that philosophy, which is why we frequently write about the market’s evidence as it presents its case day by day. Currently, there’s no doubt the evidence favors the bears, so a defensive stance is appropriate.

This is an excerpt from Cabot Growth Investor, where we’ve been picking the best growth stocks since 1970. Cabot’s flagship advisory combines expert stock selection and award-winning market timing. It’s the most complete and most helpful, growth-oriented investing advisory available anywhere.

Michael Cintolo is Cabot's Vice President of Investments and Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader. To read customer reviews of Cabot Top Ten Trader, click here. To read reviews of Cabot Growth Investor, click here.

Michael Cintolo can be found on Google Plus.

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