Stock Market Video
The One Simple Rule that can Save Your Portfolio during Market
Winds Blow Hard On High Hills
In Case You Missed It
In this week's Stock Market Video, I discuss the situation in
the market, which is positive, but not exuberant. The major
indexes have rebounded from last week's correction, but there's
still a lot of anxiety in the air. I look at some chart patterns
that can help to find a good buy point for strong stocks. Stocks
), PulteGroup (
Gap Inc. (
One Simple Rule …
I wrote last week that I would tell you how to take control of
your portfolio when market conditions change. So this week, I'm
jumping on the "one simple rule" bandwagon that seems to be
sweeping the Net to give you an investing idea that can save your
portfolio when things get stormy.
I know that this will seem like a radical idea, because
investment advisors have been telling us for years that 1) you
can't time the market, 2) it's not possible for an individual
investor to beat the market (the Efficient Market Thesis) and 3)
accordingly, a widely diversified buy-and-hold strategy is the
only one that makes sense.
You should recognize this argument, because it's one that most
financial advisors and virtually every mutual fund company
stresses. "Have exposure to every sector (so if one sector goes
down, another will go up). Don't mess with your allocations. Just
keep throwing money in."
That's a lot to take on, but I'm only going to tackle one
small corner of it today, and that's the idea that it's
impossible to time the market.
To start, I have a question for you: If you thought the market
was headed down, how long would it take you to clear your
portfolio and go to cash?
Think about it. If you were convinced that stock markets were
entering a bear phase, and you wanted to get out of your S&P
500 index funds, how long would that take you?
Personally, given my concentrated stock portfolio, I could
probably liquidate all of my holdings in under five minutes,
including the time it took me to log on to my online broker.
I know. I've done it.
One reason big fund managers say you can't time the market is
that THEY can't liquidate their portfolios. In the first place,
their investment guidelines require them to be heavily invested
in the securities described in the fund's investment prospectus.
And in the second place, even if they could go to cash, their
enormous investment positions would require months to sell
without incurring huge losses as their sales drove prices
So one big advantage that you have over big investment funds
is that you can get out of the market any time you want. And you
can do it almost instantly.
So here's the rule: Any time the S&P 500 Index drops below
its 50-day moving average and the average turns down, you sell
any S&P 500 index funds you own and go to cash. And you stay
in cash until the Index rises above its 50-day moving average and
that moving average is trending up.
When the S&P 500 Index (the most widely used proxy for the
broad market) is headed up, you own it, gaining exposure to
stocks. When the Index is headed down, you sell your broad equity
exposure and go to cash.
On average, you may have to buy and sell your S&P index
funds a few times per year. But if you do this, your gains can be
As an example, here's what it would have looked like if you
had followed this one simple rule and exited your S&P index
funds when stocks fell in 2008.
S&P 500 Index Chart for 2008 With 50-Day Moving
You would have begun the year in cash, and bought your S&P
500 index funds in mid-April when the Index topped its 50-day
moving average and the average turned up. You would have sold
again in June (at a profit). Even when the Index poked its head
above its 50-day in August, the average didn't turn up, so you
would have been out of the market for the entirety of its 2008
It's not on this chart, but you would have reentered the
market in May 2009, and would have stayed in all year, not
selling again until late January 2010.
In 2008, when the S&P 500 Index was going through a
disastrous drop from 1,468 to 903 (a 38.5% haircut), you would
have lost nothing. That's leaving out the potential small gain in
April and May.
Cabot has worked for decades to perfect our market timing
indicators. We have short-, medium- and long-term indicators that
involve a mix of sector indexes, averages and new highs and
These indicators work because they don't try to predict what
the market is going to do. No one can do that consistently and
accurately. Rather, they allow us to eliminate most of the noise
in the market data and identify the actual trend of the
Using the one simple rule I've given you, you can do the same
thing for the portion of your portfolio dedicated to the S&P
If you have friends who got slaughtered during the bursting of
the Housing Bubble and the subsequent market meltdown-or missed
the profitable upmoves since-this would also have given you some
interesting bragging rights when you were swapping investment
Here's this week's Contrary Opinion Button. Remember, you can
always view all of the buttons by
Winds Blow Hard On High Hills
Tim's Comment: Just ask Tiger Woods, or Mark Sanford, or
Elliott Spitzer, all of whom suffered widespread scorn when their
"indiscretions" were publicized. Before their falls from grace,
those men were on top of their respective worlds. And so it can
be for the investor who stands on top of his own financial world
thanks to wise investment choices, combined perhaps with a bull
market and a certain amount of luck. When all seems perfect,
that's the time to be on guard. The trip down can take less time
than the trip up.
[Editor's Comment: Stock market profits are hard to come by
and easy to lose. This button reiterates the warning that it's
easy to get ahead of the house in Las Vegas, but few go home with
the house's money in their pocket.]
In case you didn't get a chance to read all the issues of
Cabot Wealth Advisory this week and want to catch up on any
investing and stock tips you might have missed, there are links
below to each issue.
Cabot Wealth Advisory 10/1/12 - The Bad Stock
and the Ugly Stock
Having discussed good stocks in a previous issue,
Cabot Small-Cap Confidential
editor Tom Garrity uses this one to talk about bad and ugly
stocks and how to recognize them. Stock discussed:
Cabot Wealth Advisory 10/2/12 - Nuclear
Weapons, Contrary Opinion and Winning Stocks
In Tuesday's CWA, Tim Lutts, who edits
Cabot Stock of the Month
, details why he doesn't worry about the big issues that get
headlines, like Iranian nukes. Contrary thinking means looking
out for the un-obvious. Stock discussed:
Cabot Wealth Advisory 10/4/12 - How I Got My
Start in Value Investing
Friday's issue of Cabot Wealth Advisory featured Roy Ward's
story of how he and his colleagues developed the software that
drives the stock picks in Bejamin Graham Value Letter. Stock
Nu Skin Enterprises (
Have a great weekend,
Cabot Wealth Advisory
Cabot China & Emerging Markets Report