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Peter Brimelow
Oct. 21, 2010, 12:08 a.m. EDT
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Adens say end is nigh, but stocks good for now
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Airline earnings: As good as they get?
By Peter Brimelow, MarketWatch
NEW YORK (MarketWatch) "” Stocks rebound, and a bull feels vindicated.
When I last checked in with Cabot Market Letter, it was taking the strain of the summer slump, having turned bullish earlier some months earlier. ( See Aug. 16 column.)
That interested me, because Cabot was one of the first letters to recognize the post-2002 bull market "” and to bail out in late 2007. More recently, it had been bravely bullish in 2009. ( See June 18, 2009, column.)
Now Cabot feels vindicated. Its most recent issue, just out, reports that all of its indicators "” long-, medium-, and short-term "” are bullish.
It comments: "A heady multi-week run combined with earnings season means some choppiness is likely; we might have gotten a taste of that on Tuesday, when some earnings disappointments invited selling pressures. But all of our market timing indicators tell us the bull trend is healthy and intact, so you should continue to expect higher prices over time."
Cabot is particularly scathing about the notion that Tuesday's drop had anything to do with China's interest rate hike.
"China's economy is BOOMING. And China isn't running a national deficit of $1.3 trillion! China ran a SURPLUS of $54 billion in the first half of 2010. No, the real reason for the drop was simply this: The market had become a bit overextended after its six-week run, so it was time for a correction."
Cabot's formula: "Remain heavily invested, particularly in strong stocks in strong sectors where the perceptions of investors about future revenues and earnings are increasing. Among the sectors high on our watch list are China, Latin America, mobile telephony, alternative energy and network optimization, acceleration and security. Buy on corrections, especially to the 50-day moving average on light volume. And when stocks don't behave as you expected them too, cut them loose."
Cabot's disciplined combination of market timing and stock selection driven by fundamental and technical factors has worked (although the Hulbert Financial Digest thinks its pure market timing is better than its stock selection).
Over the year to date, Cabot is up 9.5% by Hulbert Financial Digest count against 5% for the dividend-reinvested Wilshire 5000 Total Stock Market Index. Over the past three years, the letter is up annualized 2.42% versus negative 6.46% annualized for the total return Wilshire 5000. Over the past five years, the letter was up an annualized 5.93% compared to 1.11% annualized for the total return Wilshire 5000.
This disciplined approach extends to stocks. Standing type informs the reader: "Cabot's policy is to sell any stock that shows a loss of 20% in a bull market (15% in a bear market) from our original buy price, calculated using the current closing (not intraday) price."
An example: Cabot's recent decision to sell VMware Inc. /quotes/comstock/13*!vmw/quotes/nls/vmw (VMW 73.39, +0.27, +0.37%)
"VMware suffered a huge volume drop two weeks ago, breaking below its 50-day moving average, but also falling into an area of support in the mid-70s. We held on, giving the stock a chance to find its footing and to see how the earnings played out. Unfortunately, the earnings reaction has been poor "” despite a 46% jump in revenue and earnings rising by 63%, the stock took a tumble this Tuesday, partly due to market weakness. That makes for two abnormal looking declines, and we're left with a small profit, so we advise selling and moving on to greener pastures."
In its place, Cabot bought Google Inc. /quotes/comstock/15*!goog/quotes/nls/goog (GOOG 607.98, +0.15, +0.02%)
"Google was a big winner in the middle of the 2000s as it dominated the rapidly growing market for paid Internet search. However, in the U.S., that market is mature; growth in its core business is solid but not spectacular. So why recommend Google? Because the company is reinventing itself "” revenue from display and video-related ads (such as those on YouTube, which is attracting two billion page views per week) and mobile searches (thanks to its popular Android operating system) are now running at a combined $3.5 billion annually. "¦ Investors agree "” GOOG gapped up 11% on more than five times average volume last Friday after blowing away earnings expectations. We think the stock is a good buy here and expect higher prices."
Peter Brimelow has been an editor at Barron's, Fortune and Forbes and is the author of "The Wall Street Gurus: How You Can Profit From Investment Newsletters."
A stellar batch of quarterly profits sends the sector to a three-year high but could prove tough to duplicate, writes Jim Jelter.
2:43 p.m. Oct. 20, 2010
- ken225 | 11:34 p.m. Oct. 20, 2010
"Peter Brimelow: Stock market bull feels vindicated http://on.mktw.net/buKUEk" 11:14 p.m. EDT, Oct. 20, 2010 from MKTWBrimelow
"Peter Brimelow: Adens say end is nigh, but stocks good for now http://on.mktw.net/drzjtJ" 2:16 a.m. EDT, Oct. 18, 2010 from MKTWBrimelow
"Peter Brimelow: Is there a bond bubble? http://on.mktw.net/b5Y0gB" 9:15 a.m. EDT, Oct. 14, 2010 from MKTWBrimelow
"Peter Brimelow: Gold: Not over yet? http://on.mktw.net/cuhKWj" 11:27 p.m. EDT, Oct. 10, 2010 from MKTWBrimelow
"Peter Brimelow: Linde Equity Report keeps rolling along http://on.mktw.net/d858t2" 6:26 a.m. EDT, Oct. 7, 2010 from MKTWBrimelow
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