The Iconoclast Investor

The U.S. stock market has been showing a few signs of life recently, which is good.  I hope the period of catastrophic declines we’ve been going through hasn’t hurt your portfolio too badly (although I suspect the pain has been pretty widespread).

I have been telling the subscribers to the investment advisory I edit, Cabot China & Emerging Markets Report, to be more than 80% in cash for a while now.  In fact, I sold the last stock from the Report’s portfolio on October 16.  Before that, the Report had been cutting back steadily since July.

It’s a message you probably read in these pages, too.  Every editor of Cabot’s growth newsletters has had the same advice.  I hope you took our advice to heart, because it is the only rational way to handle this kind of negative market.

Markets don’t stay down forever, and this historic selloff has created a whole raft of bargain stocks.  There’s just one problem.

How do you know when to get back into the market?

Here’s an easy way to tell, one that’s based on one of Cabot’s powerful set of market timing indicators, the Cabot Tides.

This method will help you figure out when the market’s recovery is robust enough to make it worth your while to start investing again.  It won’t guarantee success for either the market or your individual investments, but it will put the odds in your favor and give you the confidence you need to overcome the aftereffects of this bearish period.

Step One: Get an online chart of the S&P 500 Index.  This will be available on most sites that feature finance sections.  Yahoo! Finance: use symbol ^GSPC or StockCharts: use symbol $SPX will do fine, although just about any chart facility will do.

Step Two: Set the chart to show two moving averages, the 25-day and the 50-day.  Yahoo! uses pull-down menus, while StockCharts keeps its controls below the chart.

To get a new buy signal, you need two things:

First, the Index itself must rise above the lower of the two moving averages.  (As I write this, the Index is pulling back to just below the 25-day moving average).

Second, the line for the moving average must be moving up.  (Today, the 25-day average is still trending resolutely down.)

Both of these conditions must be met to produce a new buy signal.  When you get a buy signal, you can start putting your money back to work, although you will still need to follow the other rules for growth investing, such as buying on pullbacks, cutting your losses short, averaging up in your winners and stepping into the market gradually.

This indicator–I’ll call it the Simplified Cabot Market Timer–isn’t as finely tuned as the timing indicators refined by the Cabot Market Letter during its 38 years of publication, but it will serve you well if you follow its advice.