It’s the System, Not the Markets

06/13/2011 12:30 pm EST


Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

Predictions don't make you money, especially in this kind of market. What makes you money is sticking to a proven system, observes Mike Cintolo of the Cabot Top Ten Weekly.

For the first four weeks or so of this market correction, which began on May 1, the environment wasn't too bad.

The major indexes were down 2% or 3% from their highs. While many leading stocks were faring worse, it wasn't a horror show ... more of a consolidation than a huge retreat

However, since June 1, there's no doubt that the market's character has changed, with sellers starting to unload—all indexes have hit new correction lows, and many stocks (even those that had been holding up well) have been hit very hard.

And, as usually happens a few weeks into a downturn, the news has turned bearish—last week's unemployment report was just the latest in a long line of disappointing economic reports.

That has led to some scary headlines, and a ton of predictions from pundits.

Some are predicting a huge bear market, while others think a massive bullish turn is about to occur. (I actually read an article talking about Dow 20,000. Seriously.) But it seems as if everyone has an opinion on where the market is headed in the months ahead.

What do I have to say about all this? My main thought is that predictions have nothing to do with making money in the market. The successful investors don't concern themselves with labels (secular bull, cyclical bear, correction, pullback, rally, etc.) or what will happen six months down the road.

Instead, they focus on the ever-present moment of now—if the market is unhealthy, as it is today, you remain defensive and focus on preserving capital. If it's bullish, you buy stocks according to your system. That's it.

For example, when we first turned defensive in November 2007, we had no idea that a year later, the economy would be in the worst crisis since the Great Depression and that the Dow would be below 8,000.

And we didn't have to know that! All we did was follow the market's trend (down) and remain defensive until the bulls took control again.

Obviously, that's an extreme example, but the point is that predictions don't help you ride bull trends or avoid bear trends—time-tested systems do.

For what it's worth, I still don't think the evidence supports a major bear phase from here; the typical bear market warning signs (like deteriorating breadth, which reflects a huge number of new lows as the indexes hit new highs) never appeared around the Dow's top.

But the market doesn't care what I or anyone else thinks, so I don't take any action based on thoughts like this. Instead, I'll just take it one day at a time, patiently waiting for the all-clear signal to tell us when to begin a new buying spree.

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