Change in Fabian’s Tune Causes Some Squawks

One of the oldest and most-followed stock market timing services for individual investors has changed its timing system. And some of the system’s clients are screaming “Heresy!�

On Jan. 6, the principal U.S. stock market trend indicator tracked by Huntington Beach-based Fabian Investment Resources flashed a “buy� signal, which usually means that Fabian followers are supposed to shift all of their available cash into stock mutual funds--no questions asked. With about $2 billion following the system, according to Fabian estimates, the buying power it wields is considerable.

But this time, Doug Fabian--who manages the service with his sister Mary Jayne Fabian Barnett--shocked some subscribers by advising them to proceed cautiously with the signal, and invest only 50% of what they would ordinarily put in stock funds.

Doug Fabian’s nervousness stems from the mixed signals coming from other stock market barometers, he says, after a strange year in which many stocks plummeted even though most broad market indexes recorded only small losses. He’s not convinced that U.S. stocks are beginning a sustained upward move.

But for Fabian followers who’ve been on board the timing service since Doug’s father, Dick, developed it in the mid-1970s, Doug’s decision to second-guess the system has created a minor firestorm.

“I’ve taken some serious heat from subscribers,� he admits. “People have asked me, ‘Does your dad know you’re doing this?’ �

In fact, Dad does know and approves, 37-year-old Doug claims. But the reaction is a measure of the intense trust many of the Fabians’ 32,000 subscribers profess for the simple, normally one-decision timing model.

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The Fabian system tracks an index of five U.S. stock mutual funds, charting the day-to-day price of that index against its 39-week “moving average.� A moving average smoothes out the daily fluctuations in an index, providing a clearer picture of its basic trend, up or down.

If the daily index is above the moving average, Fabian investors are supposed to stay fully invested in stocks, because historically that means a bullish market trend is still in place. But when the daily index falls below the moving average, Fabian investors are supposed to sell their stock funds and shift into money market accounts, because the general market trend is more than likely down.

Measured since 1980, the Fabians’ system is rated No. 1 of all market timing services tracked by independent newsletter Hulbert Financial Digest in Alexandria, Va. Most important, the system has beaten buy-and-hold since 1980, a distinction that no doubt keeps many subscribers hooked--even though in recent years the system’s performance has lagged.

For example, in the five years ended last Sept. 30, the Fabians’ method of moving in and out of specific stock funds using the 39-week moving average indicator would have earned a subscriber 48.8% overall. In contrast, simply staying put in the market that entire period--i.e., buying and holding--would have earned 54.7% as measured by the Wilshire 5,000 stock index.

Doug Fabian says his decision to only half- obey the latest Fabian index “buy� isn’t a direct response to the system’s recent laggard performance, but rather stems from a desire to keep subscribers from being “whipsawed� by rapid-fire buy-sell signals in a dicey market. Whipsaws have been a problem before, he concedes, and they haven’t helped long-term results.

Historically, the Fabian system generates one round-trip into, out of and back into the market each year, on average. Last year, Fabian subscribers sold out in March, re-entered in August, then sold again in November. For the year, that produced a 5.6% loss, the Fabians say--worse than the buy-and-hold performance of most stock indexes. (Hulbert’s confirmation of those results isn’t completed yet.)

To re-enter the stock market in full on Jan. 6, Doug Fabian decided, was simply too risky, given the uncertainty still surrounding interest rate trends and other big-picture concerns.

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The problem some of his subscribers have with that decision, however, is that the Fabian system was designed to remove emotion and subjectivity from investing. It’s supposed to be a cold, efficient judge of market trends, getting investors into stocks when bull markets are running and getting them out before bear markets do their worst damage. There aren’t supposed to be halfway bets.

Doug Fabian concedes that he has introduced an element of subjectivity into the system. “We are going away from strict adherence to the doctrine,� he allows. But he believes that such caution is warranted, and makes sense for most subscribers. Moreover, he says his subjectivity is tightly restricted: If the Fabian fund index moves 5% above its price on Jan. 6, when the buy signal was generated, Doug says he’ll advise subscribers to get fully invested again.

Even so, he says he understands why longtime subscribers may be upset and nervous.

Mark Hulbert, of Hulbert Financial, says he will reserve judgment on Doug Fabian’s decision. But he adds that with any disciplined market timing system, “when you start second-guessing, it can be an Achilles’ heel.�

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The Fabian Way

Independent studies have confirmed that the stock market timing system used by Fabian Investment Resources has produced superior gains over the very long term. Yet over the last five years, the Fabians’ timing system and mutual fund recommendations have lagged simple buy-and-hold investing. U.S. stock performance data for two periods:

5 years Jan.-Sept. ’94 to Sept. ’94 Fabian return: Timing only -3.9% +41.7% Fabian return: Fund selection -3.2% +48.8% Market return: Buy-and-hold* +0.7% +54.7%

* Using Wilshire 5,000 stock index

Source: Hulbert Financial Digest