Three Lessons From 2012

Michael Cintolo of the top performing Cabot Market Letter recently reviewed three key lessons he’s learned or relearned in 2012.

Cintolo says that one of those key lessons involves relying on your investment system when times get stressful. While it is good to have a plan for different scenarios, he says, “obsessing over every scenario is stressful and often counterproductive. We used to have a saying in the office: ‘When you’re confused, turn it over to the rules.’ After all, if you have a system, it’s there for a reason — to rely on it! And by doing so, not only are your decisions usually better, they’re easier to make.”

Cintolo also says that 2012 was a good example of why you shouldn’t get caught in the middle when there’s no strong trend in the market. “Think of it this way — we’ve seen stocks do well, but generally in a three-steps-forward, two-steps-back manner,” he says . “Thus, you want to either sit through all five steps to develop bigger gains, or at least take some off the table after the first couple of steps on the way up.” He adds that until a stronger market trend develops (which he is optimistic could happen in 2013), it’s “probably best to incorporate some partial selling strategies on the way up — say, booking one-third or one-half after you’re up 10% or 15% — or, conversely, practicing patience with winners during a market correction, allowing a few to rebuild bases.”

Top Strategist: Value Doesn’t Matter

While many investors don’t consider a stock without looking at its price/earnings ratio or some other valuation metric, Michael Cintolo of the top-performing Cabot Market Letter says he doesn’t look at valuation. 

“The stock market is a contrary creature; when dealing with growth stocks, you generally get what you pay for,” Cintolo writes in a piece for Nasdaq.com. “It turns out that things like P/E ratios are not great predictors of future growth stock performance. In fact, the vital truth is that many investors are confusing the cart with the horse: Valuation is often the RESULT of great performance, not the CAUSE of it.”

Cintolo explains that during bull markets, thousands of mutual, hedge, and pension funds have to own stocks, and they will focus on “the real leaders that have the best products, the fastest sales and earnings growth and the surest prospects to continue growing rapidly for many years.” As funds load up on those stocks, their valuations balloon, he says. “What causes the buying demand in the first place is the growth, the unique products and the enticing prospects for the future.”

Cintolo stresses that he’s talking about true leaders — stocks like Apple, Netflix, and Lululemon have been in recent years. And he says timing is critical in terms of knowing when the bull market is fading and the big fund investors are bailing.

As for current market conditions, Cintolo likes what he sees. “The market actually bottomed back in early June, but anyone who tried buying strength for the six or seven weeks following that low was burned,” he says. “In my mind, what really transpired was a prolonged bottoming process, where the indexes chopped around (there were an incredible nine swings, both up and down, of at least 4% in the Nasdaq from that June low until the end of July!!) as money very slowly rotated from defensive stocks (tobacco, big telecom) into more traditional growth areas (chips, networking, software, retail, etc.).” He says he’s not “super-bullish”, but he’s not “souring on the market — if anything, the advance has picked up a little steam as the sellers have run out of ammunition.”

Top Newsletter Stays Disciplined Amid Fears

Michael Cintolo, editor of the top-performing Cabot Market Letter, thinks some weak recent economic data may actually be a precursor to an upward move for stocks.

“Anecdotally, we think [this week's] horrible manufacturing report (the first contraction in the sector since 2009) fits well with a bottoming market — you often will see these types of backward-looking indicators produce scary readings near turning points,” Cintolo said, according to MarketWatch. “That’s not a prediction, just an observation.”

Cintolo said he’s “not ready to jump in with both feet quite yet” when it comes to the stock market. His advice: “Sit tight with about half your portfolio in cash, and half in leading stocks. Last Friday’s huge market rally was very encouraging and puts our Cabot Tides back on steadier footing. We’re optimistic, but we’ll sit tight with our current crop of six stocks for now … watching them and many others closely; if the market’s recent upmove continues, we’ll likely extend our line in the days ahead.”

MarketWatch’s Peter Brimelow also offers a look into Cintolo’s strategy, which relies on fundamental and technical analysis and several moving averages — and a lot of discipline. In a recent letter, Cintolo asked rhetorically whether one should get out of the market amid all the economic fears. “Not us!” he said. “Instead, our advice is to do what we always do … follow the system. Today, that might feel more like riding a bucking bronco…but, while we’re all following the world’s news and rumors (and seeing the market react to them) on a daily basis, it’s a good time to remember the rubber-meets-the-road principle of growth investing — namely, that the big money is made in the big swing, by owning big positions in the best leading growth stocks during a major bull move.”

Top Newsletter Cautious, But on the Prowl

One of the top-performing investing newsletters is being very cautious, holding a high amount of cash while searching for opportunities amid the recent market sell-off.

“We’re not in any rush to plow back into the market right now … but we’re also not opposed to doing a little fine-tuning here or there if we see a great story and setup,” the Cabot Market Letter recently stated, according to MarketWatch’s Peter Brimelow. “Overall, we feel now is the time to sit back and let the market chop around, while homing in on the potential leaders of the next leg up.”

Cabot has made several accurate calls on the market’s major moves over the past several years and has averaged annualized returns of nearly 11% (vs. 1.33% for the Wilshire 5000) over the past five years, Brimelow notes. Its portfolio is now 58% in cash. Among the stocks it has an eye on right now: Amazon.com.

Cabot also offers an interesting take on gold, discussing the SPDR Gold Trust ETF: “The trouble with gold as an investment is that it’s a pure pessimism play, and markets generally reward optimism in the long run,” the group says. “AVOID.”

Discipline Crucial, Top Newsletter Editor Says

The Cabot Market Letter is having another market-beating year, and its editor is preaching discipline amid the current market volatility.

“Going forward, it’s important to remember to take your cues from the market itself, and not from the headlines that are sure to push the market up and down in the days ahead,” Michael Cintolo recently wrote to subscribers, according to MarketWatch’s Peter Brimelow. “The goal is to preserve most of your capital today, so that you can make that much more once a new uptrend truly gets underway.”

Brimelow says Cintolo showed his discipline over the past week. On Sept. 21, Cintolo and Cabot said they’d be putting part of the Market Letter portfolio’s substantial cash position back into stocks, as several of its medium-term timing indicators flashed a “buy” signal. (Cabot uses a mix of fundamental analysis and a disciplined market-timing system that focuses on moving averages.) When the market tumbled Thursday, however, Cintolo said that Cabot’s timing system went back into bearish territory. Cintolo stuck to the system, and Cabot quickly sold some positions and downgraded others in its model portfolio, according to Brimelow.

Cabot’s track record is excellent. Over the past decade, its Market Letter portfolio is up 7.56% annualized vs. 3.67% for the dividend-reinvested Wilshire 5000 Total Stock Market Index, Brimelow says. Over the past five years it’s been even better, gaining 13.17% annualized vs. 1.28% for the index.

Two Top Newsletters Optimistic — and Cautious

Two top-performing stock newsletters are sounding optimistic on stocks, though both are also exercising some caution, MarketWatch’s Peter Brimelow reports.

One, the Cabot Market Letter, recently stated that it is “still more positive than negative. But — and it’s a big but — as long as market leadership remains narrow, we’ll remain apprehensive. We really can’t be gung-ho about this market until we see breadth improve substantially.”

The other, Sound Advice, said last week that it expects the recovery will continue and we will not see a double-dip recession. But, it added that “the expansion will be fitful, which means that bad news will hit, growth will be uneven and until unemployment begins to show signs it is waning that share prices will have weeks like this. We recognize that this is an unpopular position, and can only say in our defense that we’re rarely found taking comfortable positions.”

Two Top Newsletters Bullish

Two stock-investing newsletters with excellent long-term track records are sounding quite bullish, despite — or, perhaps more to the point, in part because of — the significant amount of fear that remains in the market.

One of the two is Sound Advice, which turned bullish in early 2009, reports MarketWatch’s Peter Brimelow. The newsletter recently said that a double-dip recession might well occur, but that that doesn’t mean bad times for stocks. It cites a half-dozen post-World War II expansions in which GDP turned negative or slowed significantly after its initial upward turn, before the upward trend then resumed.

“Skepticism about the economic recovery continues, and substantial anxiety about the durability of a recovery for stock prices also lives on,” Sound Advice says, according to Brimelow. “With few exceptions, this combination of anxiety usually points to higher prices.”

The other top newsletter sounding bullish is the Cabot Market Letter, Brimelow reports. “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,” the newsletter recently stated. Cabot is now 65% invested in stocks, Brimelow reports, adding that the letter also says the “Presidential Election Cycle” bodes well for stocks. Cabot says a rally into 2011 could push the Dow Jones Industrial Average “well above 13,000 and even to 14,000. It might sound crazy, but history suggests it’s not just possible, but likely!”