Stock Market Video
Talking About Exchange-Traded Funds with Robin Carpenter
When Wisdom Fails Luck Helps
In Case You Missed It
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In this week's Stock Market Video,
Cabot China & Emerging Markets Report
Editor Paul Goodwin says it hasn't been a great week in the market,
but it hasn't quite hit new lows yet. It's still a good idea to
have your stocks on short leashes though. Featured stocks:
NetEase (
NTES
), Monster Beverage (
MNST
), Cirrus Logic (
CRUS
)
and
PetSmart (
PETM
)
. Click below to watch the video!
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Robin Carpenter has been analyzing the movements of the stock
market since the 1970s, when he founded The Stock Market Laboratory
to provide technical analysis to portfolio managers. Robin is also
a pioneer of modern market analysis, having originated many
statistical models such as moving beta, cross-sectional skew and
dispersion, and developed investing strategies based on alpha
hedging and market timing.
For more than two decades, Robin has run Carpenter Analytical
Services in Hanover, New Hampshire, which provides statistical and
analytical services to investment professionals. He joined
the Cabot team in September 2011 with the launch of
Cabot ETF Investing System
. Today, Robin's taken the time to chat with me about his interest
in market analysis, the state of the current market and a little
about exchange-traded funds.
Matt: How and when did you first become interested in market
analysis?
Robin:
When I was in high school, I was given a book, written by Joseph
Granville, with the somewhat clumsy title "A Strategy of Daily
Stock Market Timing for Maximum Profit." I read that book
(and a few others) several times. And so I began collecting
market data and testing ideas. Unlike today, market data had
to be compiled literally by hand, and calculations were mostly by
slide rule and recorded on paper.
Doing all that by hand would seem unbearably tedious today, but
back then it was just the way it was done. And by the way,
it's not a bad way to start. There's something about actually
crunching numbers the hard way--recording, computing, comparing,
adjusting--that helps to internalize relationships. It's
slow, and it's cumbersome, but it gets things inside your head in a
way that slick software and instant computing doesn't do so well.
Matt: What led you to exchange-traded funds as an
investment method?
Robin:
The first exchange-traded funds (ETFs) were substitutes for broad
index mutual funds, with the added benefit of low fees and
intra-day liquidity. They're still that, but now there are
specialized ETFs that focus on sectors, industries, commodities and
alternative asset classes. It was this "slicing and dicing"
that attracted me, not for investment at first, but as proxies for
the indexes they track. They provide a fast, easy and cheap
way to follow the ebbs and flows of the markets. If you want
to measure how micro-cap stocks are doing, or value stocks, or
maybe silver, or the U.S. dollar or other currencies, there's an
ETF (or several) tracking it. They give a quick, reliable
read on what's up, with updates available throughout the day.
And it's almost free.
A huge amount of market differentiation--what's strong and what's
weak--is accounted for by sectors, industries or asset
classes. If Utilities are strong, they're all strong. (Well,
almost all.) If regional banks are weak, they're usually all
weak. And it's just a lot easier (for me, anyway) to assess
prospects by type of business than to search for specific strengths
or weaknesses in hundreds of individual companies.
Matt: How did you design the strategy of
Cabot ETF Investing System?
Robin:
I learned of a sector selection model that has a solid record of
outperforming the market, and that is based on quantitatively
objective economic analyses. I did a thorough review of its
selection performance--right down to daily fluctuations--and am
persuaded that it's valid and successful in identifying sectors
that usually outperform the S&P 500, and with less volatility.
I realized that if the selection model were combined with good
market timing, it could be the basis of a unique service. I
had met Tim Lutts, president of Cabot, a few years earlier, and I
remembered he said his subscribers have a high interest in ETFs. I
knew Cabot had a timing model that is also quantitative and
objective. So I met with Tim and we back-tested the selection
and timing in combination. The tests were successful, so we
designed
Cabot ETF Investing System
to meet that need.
Matt: What makes a particular sector "favored?"
Robin:
The selection model is really pretty complicated. Unlike most
sector models, we can't say XYZ sector is Favored because of on
particular factor, say, interest rates. Or because of
inventories or employment data. In effect, the model
generates a whole profile of economic factors and looks to see what
sectors have excelled in the past when conditions were "like that."
Matt: What's the benefit of investing in sector ETFs versus
other types of exchange-traded funds?
Robin:
As I mentioned, there's now a really full range of ETF types
available. We still have the very broad index ETFs (like SPY
tracking the S&P, or IWM tracking the Russell 2000). We
have sectors (like the SPDR sector ETFs we use), and we have
individual industries (like GDX for gold miners or IYT for
transportation). The very broad indexes wouldn't give us a
basis for differentiation. The narrow industries might work
OK over time, but the narrower the target, the higher the chance
idiosyncratic surprises will occur. So the SPDR sectors
balance those issues, giving sector specificity for
differentiation, while each sector includes a limited range of
industries that provides partial diversification within the genre.
Also, the SPDR sector ETFs are very liquid, so we always know we
can get in or get out when a change is called for.
Matt: Is there a certain type of person who invests in ETFs
instead of individual stocks?
Robin:
Well, I don't know that there's a "type of person," but there is a
"type of objective." Investors who find it easier to
understand the economic dynamics of a whole class of securities
like a sector or industry--and wish to gain or shed exposure to
that class--are natural ETF users. Alternatively, an investor
seeking broad exposure but who wants to manage the weightings
(rather than just buy the SPDR S&P 500 (
SPY
) with its weightings) can do it with ETFs. (And there are
even individual ETFs that offer S&P sectors in proportions
different from the S&P weights.)
Matt: What do you think of the current market as it relates
to ETFs?
Robin:
We are now in a downtrend as defined by the Cabot Tides
indicator. In a downtrend, most stocks go down, and almost
all sectors go down. As a result, the
Cabot ETF Investing System
is holding cash. That's how the System works. So right
now we're preserving buying power for the next Buy signal.
When that signal comes, most ETFs will move higher with the
averages. We hope and expect that the Cabot Favored ETF
sectors will be stronger than average. But the market is a
constant kaleidoscope and we'll have to peer closely at that when
the time comes.
Matt:
Thanks for taking the time to talk with me. For more of Robin's
recommendations, or to learn about
Cabot ETF Investing System
,
please click here now.
---
Here's this week's Contrary Opinion Button. Remember, you can
always view all of the buttons by
clicking here.
When Wisdom Fails Luck Helps
It's true; sometimes an investor gets lucky. A company gets an
unexpected takeover offer, or a competitor stumbles. But you don't
want to depend on luck. Do your homework, and try to be wise.
---
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 5/28/12 - For Energy Investments, Look North
of the 48th Parallel
On Monday,
Cabot Global Energy Investor
Editor Lou Gagliardi discussed the decline of world oil production
in traditional regions. Lou advised that energy investors look to
Canada as part of the future because of that country's abundant
reserves of oil sands. Featured stocks:
Suncor (SU), Meg Energy (MEG)
and
Cenovus (CVE
).
Cabot Wealth Advisory 5/31/12 - Market Down, Invest Less: Market
Up, Invest More
On Thursday,
Cabot China & Emerging Markets Report
Editor Paul Goodwin wrote about the preference for simple rules
when it comes to investing. Paul then discussed his simple rule for
making and keeping money in the market: When the market is up,
invest more ... when it's down, invest less. Featured stock:
Boston Beer Company (SAM)
.
Happy Investing,
Matt Delman
Editor,
Cabot Wealth Advisory