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By Mike Cintolo

For my last issue of 2011–a very challenging and, in many ways, confusing year for investors–our fantastic editor Elyse Andrews thought it would be a neat idea to interview me and get my thoughts on the market, what the future might hold and address some of the knowing questions on everyone’s mind. Here’s what came out over our 30-minute chat.

As this is my last issue of the year, I want to first wish you and yours the very best of holiday seasons, and to thank you for reading my (and all of our editors’) musings this year. We love what we do, and we’re thankful to have many faithful readers.

Now, on to the interview.

Elyse Andrews: Mike, 2011 is winding down, and the market is hovering just about where it started the year. As a student of the market, what do you make of the wild action and news that was 2011?

Mike Cintolo: Honestly, Elyse, 2011 was one of the most challenging years I’ve ever been a part of or even studied, due to the whipsaw, choppy action that has been in place since mid-February; it’s been a series of two- to four-week moves, which have then been quickly reversed. Effectively, our system revolves around trend following, both for stock picking and market timing, so these sharp ups and downs gave us little opportunity.

Even in past flat market years like 2005, there were two or three well-defined uptrends that, while not overly powerful, did provide some profits; I remember Google breaking out in April of that year and doubling within a year, and Apple was still a beast back then. Even in some of the choppy years of the late-1970s, many small-cap indexes and stocks were actually in “stealth” bull markets. This year, though, at least since mid-February, there’s been little money to be made.

However, one thing we’ve been kicking around in the office of late is the old adage, “The longer the base the longer the race,” meaning that the longer the market is effectively trendless, the longer and larger the move that comes out of it. Thus, while I make no predictions about what will come next, I do feel confident in saying that, after nearly a year of trendless action, the market should get back to its trending ways relatively soon. And that will be a good thing.

Elyse: While you just said you don’t predict what’s going to happen, you have been laying out some scenarios in Cabot Market Letter lately. What’s your latest thinking on what 2012 might hold?

Mike: To be honest, Elyse, I am torn right now when looking at the short-term. On one hand, if you look at the market from a bottoms-up perspective–meaning examining hundreds of individual stock charts–there’s not much to get excited about. I see a few stocks setting up good-looking launching pads, like Rackspace (NYSE:RAX) and MercadoLibre (NASDAQ:MELI), or even bigger names like Google (NASDAQ:GOOG) and Intuitive Surgical (NASDAQ:ISRG). But there aren’t many, and there are very few liquid, well-traded growth stocks that are near valid buy points, except for maybe GOOG and ISRG.

In fact, what’s worrisome is that most of the big, liquid winners of the bull market since 2009 look very toppy. Some names like Netflix (NASDAQ:NFLX) and Green Mountain Coffee (NASDAQ:GMCR) have already broken down. But others, like Baidu (NASDAQ:BIDU), Priceline (NASDAQ:PCLN), Wynn Resorts (NASDAQ:WYNN), Lululemon (NASDAQ:LULU) and Amazon (NASDAQ:AMZN), all have set up big tops on their weekly charts it seems. So that argues for another leg down in the market’s bear phase.

However, from a top-down perspective, we continue to think that the climactic selloffs in August and October, both of which brought more than 1,200 new lows on the NYSE, a very, very extreme reading, likely marked the peak in selling pressures. That doesn’t mean we can’t have another leg down, but if we do, it’s likely that we’ll see some positive divergences–meaning that while the Dow hits a new low or comes close, the new lows might only rise to 600 or 700. And that is something seen at nearly every major low throughout history. Either way, the point is that we’ve already seen a huge amount of selling.

Put it together, short-term, I am torn. Longer-term, my gut tells me that we’re already well into this bear phase–it’s been many months of nauseating action, and the major indexes already suffered 20% (for the Dow) to 30% (for the Russell 2000) declines, and, in my opinion, investor sentiment is horrible, telling you many are already out of the market. So whether we have another leg down or not, I am not anticipating another year or two of malaise, like 2000-2003 or 2007-2009.

Elyse: Let’s hope you’re right! In the meantime, as you wait for the market to begin a new, sustained trend, I know you’ve been sitting on a lot of cash. Why don’t you try to play those two- to four-week swings you mentioned? Can’t money be made that way?

Mike: That is a great question Elyse. There’s nothing wrong with taking a couple of small trades here or there; in fact, that’s what I’ve been recommending in Cabot Top Ten Trader lately. After all, investors are really in the business of taking risks, and while putting all your chips on the table makes no sense here, it’s not like we’re in a 2008-style debacle where you have to be hunkered in your bomb shelter.

That said, the one thing investors need to be careful of is “system drift”–that is, instead of being intermediate- to longer-term trend followers (like we are), they suddenly become short-term, overbought/oversold swing traders. Sounds easy, but in reality, it’s almost impossible to be a jack-of-all-trades investor; you’re better off knowing one system and knowing it very well. I’ve seen a lot of people try to do this, change their stripes constantly, and they usually lose money because they don’t really know how to swing trade (to use this example) or, even worse, they get out of phase with the market–meaning they start swing trading, but then the market begins trending again.

Elyse: That makes a lot of sense. So, if you’re waiting for your pitch, as you say, what would it take for you to come off the sidelines in a meaningful way?

Mike: Well, the short answer is strength–I want to see some decisive upside power in the market and, just as importantly, among potential leading stocks. We’ve seen countless big one- or two-day rallies in recent months, but at no time has that coincided with great action among leaders; usually the buying has been among the stocks that have been hit the most, or among defensive stocks like tobacco and dollar stores.

So I want to see some real-volume buying, some tightness (as opposed to the wild up-and-down action we’ve been seeing) and some real breakouts among potential top stocks. It sounds simple, and that’s the point–it is. You can’t hide a new bull market.

As a last point, I will say that I am intrigued by this Tuesday’s rally, which occurred on heavier volume and saw a few stocks pop higher. Still, I need to see more if I’m going to put any meaningful amount of money to work.

Elyse: One thing you like to write about is improving your own investing skills. What would you say are the top couple of lessons you’ll take from 2011?

Mike: Oh geez, there are more than a few. Like I said, this has been one of, if not the most challenging years I’ve had; not bad, really, but just difficult and grinding. But the good news is that you usually learn a lot about yourself and your system under adverse circumstances.

I think the biggest thing that I re-learned was the importance of being selective. It’s always good to force yourself to focus on only the best stocks with the best set-ups in the best environments. It’s very difficult to do, especially when a stock you’ve been watching to set up goes nuts on the upside, tempting you to chase it. But even in decent environments, many investors die a death of a thousand cuts–meaning they lose by taking a ton of small losses. They trade too much! So patience and backing off when conditions aren’t ideal is a good lesson.

Another “lesson” I’ve been thinking about is how you really do need a couple of good-sized winners to make good money in the market. In a year like this one, bigger winners have been hard to find, which means any winner you had was relatively small. And how many people have made good money this year with just those small winners? Very few. So it kind of reinforces one of our main tenets, which is to try to ride some stocks for big gainers.

And that sort of leads me into a third lesson. Having read the above paragraph, many people will say, “Mike, what are you talking about? If we tried to get big winners this year all we did was lose or, at best, breakeven!” That is true, but what is also true is that every year is different–and what you want to avoid is learning too much from 2011.

Said another way, if you just examine this year, you’ll say to yourself “I should book every profit I get and buy on weakness and sell on strength.” That worked this year, but my guess is that it won’t work nearly as well in 2012. Thus, when analyzing your trades, don’t assume the market environment will remain the same; instead, try to identify any repeated mistakes from prior years so that you’re improving your system in a way that will help you in any environment.

Elyse: Good stuff; I do feel like few investors really spend time to improve themselves, which is why they run into trouble again and again. Moving on, besides sitting on their hands and remaining patient, what can the average investor do now so that he or she will be in the best position for the next bull market?

Mike: First, work on a watch list. I understand that it’s difficult to stay interested in the markets when they keep chopping around, and when the holidays are coming up, but keeping up on a handful of potential leading stocks is key. Otherwise, you won’t know what to buy when the bulls return. Right now, I’m most closely watching Google, Intuitive Surgical, Nuance Communications (NASDAQ:NUAN), Rackspace, MercadoLibre and some others as clues into the minds of institutional investors. Just FYI, that list can change at any time.

Second, if you’re one of those investors that flies by the seat of his pants, now is a time to develop a game plan. Think about how much you want to invest per stock, how much you’ll risk, when you’ll book profits, and so on. I am not talking about some complicated, black-box Excel program here. I am talking about a rough sketch of a plan that you can use to guide you when the bulls return.

Elyse: We’re about out of time–do you have any other closing thoughts as we put a wrap on 2011 and head into 2012?

Mike: Well, my biggest thought is that the market is no higher than it was in April 2010, no money has been made since mid-February, and the major indexes have already suffered top-to-bottom declines of 20% for the Dow and S&P 500, and 30% for some of the small-cap indexes.

Throw in the fact that investor sentiment is just awful right now, and I think it’s important to remember that this bear phase (or whatever you want to call it) likely isn’t in the first or second inning. A lot of bad news has been priced in. Everyone is aware of the potential problems in Europe. That doesn’t mean we can’t have another leg down, but I as I said before, I don’t see another 2008 occurring. Anything is possible, but the odds are against it.

With that in mind, now is a time to lean against the wind, at least mentally–don’t get buried in the worrisome headlines, thinking that the market can’t rally. The investors who are going to make big money in the next advance are those that keep their heads up and continue the treasure hunt for the next big winners. It’s been the same at every major bottom throughout history, and I’m sure it will hold true this time as well.

Editor’s Note: Mike Cintolo is the editor of Cabot Market Letter, our flagship publication. Combining top stock picking, market timing and portfolio management, Mike has bested the S&P 500 by more than 10% annually during the past five years–a period that encompassed bull, bear and choppy markets. With a new bull market on the horizon, now is a great time to get in Mike’s program so you can take advantage of the leaders as they lift off. Get started today!

Source: A Look Back At 2011's Whipsaw Market Moves