As I’ve been telling subscribers the past few weeks, there’s a split in the market these days—the major indexes are sagging and are near their 2010 lows, yet many individual stocks are still in grinding uptrends during the past few months.  In fact, this past weekend I made it a point to closely examine the weekly charts of the major indexes and many stocks (each chart has three to four years of history).

What I saw surprised me: Many stocks are building long, multi-month launching pads, despite the weak indexes.  In fact, more than a few formed sound launching pads, broke out in July, and are now forming other bases on top of the prior consolidations—that’s known as a “base on top of a base” and is usually a bullish pattern.

I’ve also seen a few choice stocks actually pushing consistently higher in recent months in a volatile way.  Of course, it will all depend on the market’s next big move, but this pattern of gradually higher highs during the four-and-a-half-month market pullback tells me these stocks want to move higher.

Two that have similar patterns are Netflix (NFLX) and Akamai (AKAM), two big-cap stocks that I feel have the potential to help lead any coming market advance.  I won’t delve into the nitty-gritty of the fundamentals.  Suffice it to say that NFLX is positioned as the leader in on-demand video, while AKAM has the largest content-delivery network in the world, and is poised to benefit as video and data traffic continue to soar … partly thanks to on-demand video offerings from the likes of Netflix!

What intrigues me is that both of these leaders have very similar chart patterns—they each corrected sharply at the end of June, and then bounced for a couple of weeks in July … but failed to reach new-high ground.  And then each fell sharply again—to lower lows—after disappointing reactions to their earnings reports near the end of July.

That lower low caused a shakeout and formed what is known as a double bottom pattern.  But for the pattern to be complete, the stocks would have to race to new highs soon after that second low.  And they did!  Both moved up in a big way as institutions piled in.

Now NFLX and AKAM have pulled back toward the top of their prior double bottom patterns, hovering above their respective 50-day moving averages.  If you’re aggressive, I think you could buy a little (maybe a third or half of your normal-sized position) of one or both here … as long as you keep a tight, 5% to 7% protective loss limit on each position.

If the market can find a low around here and begin a sustainable advance—and I think there’s a decent chance of that—then both NFLX and AKAM have a shot at big gains.

Click here to learn more about Netflix, Akamai and other leading stocks featured in Cabot Top Ten Weekly.

Earlier this month, I wrote about why I think the future of the American economy depends on the ingenuity of the American people. Today, I’d like to share some steps I think our country can take to ensure that future is a bright one.

The most obvious step, to me, is ensuring we have the best public education system in the world, from kindergarten to college. We already have many of the best universities in the world, which is why many of the best and brightest young people from around the world come to the U.S. to study. But we need to be putting more of our own students on track, earlier, to make it to those institutions. That means improving our elementary, middle and high schools. It’s not an easy task, but we could start by compensating teachers better, so more talented people will consider the job, and by making it easier for schools to fire bad teachers.

I’d also like to see more middle and high schools offer classes in areas such as computer programming and engineering, which are relevant to jobs in the knowledge economy. Most kids today have no opportunity to study these subjects before college, so they don’t know if they’re interested in them. Strengthening our science and math programs wouldn’t hurt either.

Finally, keeping the Internet equally accessible to all, especially small content producers, is key to ensuring tomorrow’s inventors and entrepreneurs have the same opportunity to succeed as their predecessors. To me, that means passing a law to protect net neutrality, the principle that all Internet traffic should be treated equally, regardless of content or origin.

We have net neutrality now—Internet traffic isn’t sped up or slowed down, or blocked, based on what it is or where it came from. If you own a small business, your website loads at the same speed as your larger competitors’. This has allowed small and non-profit websites to stay competitive with those backed by giant companies, even as the Internet matured. And it has allowed for the rise of user-driven sites like Wikipedia and CouchSurfing, not to mention millions of blogs. However, net neutrality is not protected by law, and any one of the companies that control Internet traffic could abandon it at any time.

A recent “policy proposal” put forward by Google and Verizon is the first step toward an Internet where all traffic is not created equal. Though their proposal would only change things for mobile Internet service at this time, it confirms that the Internet’s gatekeepers are thinking about these issues, and that the time to act is now. The gatekeepers I refer to are Internet Service Providers, or ISPs, of which Verizon is one of the largest. ISPs are the companies that own the Internet cables coming into your house.

When you type a web address into your computer, or click on a link on a website, that request gets sent through your ISP’s cables, to the provider of the content you have requested, and the content gets sent back through the cables to your computer. Right now, that content travels through those cables at the same speed regardless of where it is coming from. Content from Amazon.com will travel through the cables at the same speed as content from your sister’s blog. However, ISPs currently have the very real option of treating some content differently from others.

One possibility is that ISPs could strike deals with content providers, like Google, to give their content preferential treatment, by delivering it faster than other content. That might not seem so bad: Verizon giving YouTube videos priority over other content probably wouldn’t affect how quickly you could load other sites, even if Verizon is your ISP. It would make YouTube videos load a little faster. However, that almost certainly would not be the end of it.

What happens when Vimeo, a YouTube competitor, realizes that YouTube’s videos are loading faster than its own? If they’re smart, they’re going to strike a similar agreement with Verizon and other ISPs, to give their own content the same preferential treatment as YouTube’s.  So now there’s two companies’ content being given preferential treatment, but other sites probably still load at just about the same speed.

Until 500 other companies come along, and say, hey, maybe we can get an edge on our competition by making our sites load faster. At this point, there are essentially two tiers of Internet traffic: There’s content from big companies, with lots of money, who can pay ISPs for preferential treatment. And then there’s content from individuals, like you, and non-corporate or non-profit entities, like Wikipedia and The Pirate Bay and universities, and just plain small websites that don’t have the money to pay ISPs for top-tier service.

This would be a tragedy, not just for users of those small and non-profit sites, but for everyone who ever had a dream of starting his own business on the Internet. As the founders of Google have said themselves, net neutrality is key to ensuring that the next two kids in a garage with an idea have their own chance at success.

Furthermore, prioritizing content from certain companies isn’t the only thing ISPs could do once they abandon net neutrality. They could also slow down or block some content entirely. That could be for pay, as with prioritizing YouTube content. For example, CNN.com could pay Verizon to speed up its content, and delay content from NBC.com. Or it could be for the ISP’s own benefit—Comcast, one of the largest ISPs, has a division called Comcast Interactive Media. Comcast Interactive Media owns movie ticket site Fandango.com, a social network called Plaxo, and a TV streaming site called FanCast.com that is similar to Hulu.

Comcast could easily deliver content from its own sites—Plaxo and Fandango and FanCast—faster than content from others. But the company could just as easily throttle, or even block, traffic from competing sites, like Hulu. Or, Comcast could just charge users extra for access to competing sites, while including its own sites in base-rate services. Not a member of Plaxo? How does an extra $10 a month for access to Facebook, MySpace and Linked In—let’s call it the “Social Networking” package—sound?

Finally, though profit incentives are the most likely reason for ISPs to take such steps, they might not be the only ones. Ideologically-motivated discrimination would be just as easy. If the New York Times publishes a story critical of Comcast, the ISP could easily block access to the story or slow down traffic to the site. An ISP with conservative management could just as easily block NYTimes.com altogether, or a liberal one could block Fox News.

The obvious argument against ISPs taking such steps is that they’d lose their customers. And that would certainly be true in some places. But in many other places, people have no or little choice of ISP. My last two apartments were served by Time Warner alone, and only in the last year have I had a choice: between Verizon and Time Warner. But many entire cities are served by a single ISP. And introducing competition isn’t easy, when it means installing new Internet cables under streets and in buildings.

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Of course, none of this is a reality yet—but it isn’t science fiction either. ISPs have the ability to start filtering, blocking and throttling traffic based on its content or origin any time they want to. They’re already inspecting the content that travels over their networks, in part to provide users with targeted ads. One of the leaders in this industry was actually recommended in the most recent Dick Davis Digest by Ian Wyatt, editor of the SmallCapInvestor PRO. Allot Communications (ALLT) is an Israeli company that specializes in Deep Packet Inspection, a technology that allows ISPs and others to peek at the content that travels over their networks. The company reported better-than-expected earnings on August 10, and Wyatt recommended buying up to $5.35.

Technology like Allot Communications’ has made the Internet experience better for users in many ways. By giving ISPs, wireless companies, governments and businesses more information, it allows them to tailor the online experience to users’ needs. And more information is almost always good. But unless the government passes legislation making net neutrality—the principle that all Internet traffic is treated equally—the law of the land, ISPs could start using this information in malicious ways any day.

American capitalism is great, but corporations already have plenty of ways they can turn their money into power. They already decide what we see on TV and read in newspapers and magazines. And they have unprecedented leeway to spend on political campaigns, thanks to January’s Citizens United v. Federal Election Commission decision. It would be unwise to allow the Internet to become one more place where rich corporations can buy influence.

To learn more about Red Hat and other top stocks featured in Dick Davis Digest, click here!

One of the great characteristics of the sciences, from astronomy to psychology, from anatomy to zoology, is that every generation builds on the work of those that preceded it.

As Isaac Newton put it in 1676, “If I have seen a little further it is by standing on the shoulders of Giants.”

This regular knowledge transfer happens—most commonly—because of schools.

It begins with reading, writing and arithmetic in the earliest grades, and it continues all the way through our formal college education, where students with the right combination of talent, interest and funding can enroll in courses on neuroscience, vector analysis, marine mammal cognition, psychopharmacology and much more.

Sadly, the same opportunities do not exist for investors.

Sure, you can get a degree in economics, finance or business.

You can become a Chartered Financial Analyst (CFA), which doesn’t necessarily mean that you’re a good investor, but at least means you might get a job in the industry.

You can even take courses in trading, which at least means that you’ll know how to move money around fast.

But none of those will necessarily make you a good investor.

Sure, you’ll know more, but you may not have a clue how to surmount the biggest obstacle to your investing success.

And what is that obstacle?

It’s the tendency to be swayed by emotions—both yours and the crowds’— and at the extremes to allow logic and reason to be trampled by the powers of fear and greed.

Yes, fear and greed.

In short, when people feel very optimistic about the future, as they did in early 2000, when the Millennium Bug had been averted and Internet stocks promised to bring a bright new future, the power of greed dominates and investors tend to award stocks higher prices.

Contrarily, when people feel particularly pessimistic about the future, as they did at the end of 2008, when our leaders told us our banking system was approaching a “crisis” stage, fear gains the upper hand and investors tend to award stocks lower prices.

Obviously, the best way to invest is to Buy at the point of peak pessimism, and Sell at the point of peak optimism.

Unfortunately, the system for detecting those points has yet to be discovered, and I doubt that it ever will.

But we can work toward it, first by learning more about the powerful role of sentiment, and second by measuring the emotions of investors—and potential investors—today.

To learn more, I tend to read books.  (I just re-read “Psychology of the Stock Market” by G. C. Selden, which includes this beautiful line: “Public opinion is becoming more volatile and changeable year by year, owing to the quicker spread of information and the rapid multiplication of the reading public.” The book was published in 1912!)

And to measure the current emotions of investors or would-be investors, I read the news, talk to friends, and consult a handful of experts.

Today, obviously, sentiment is quite negative, not only because very few investors have any profits to brag about, but because the economic news that dominates our headlines is so persistently gloomy.

But how negative is it?

Consider the following from Jason Goepfert of SentimenTrader.com.

“The latest survey from the American Association of Individual Investors (AAII), where the percentage of those looking for the market to rise plummeted to nearly a five-year low.”

“When you consider what we’ve been through during the past few years, this kind of give-up is astounding.

“Since the inception of this survey in 1987, there have been 48 other weeks where investors were this non-bullish.  The table below shows the performance of the S&P 500 going forward”

“Looking out three months later, the S&P was positive 47 out of 48 weeks, a pretty impressive record.  The skew between the risk and reward was clearly tilted to the upside as well.

“What’s even more notable is that this is one of only seven weeks in total when the bullish percentage dropped this low, and the S&P wasn’t trading at a multi-month low at the time.  Of the other six instances, the S&P was higher three months later each time by an average of +9.1%, an average maximum loss of only -1.5% and an average maximum gain of +11.4%.”

The interesting aspect of the present, in short, is that sentiment is so low even though the market’s performance has been that bad.

I think sentiment is poor not just because of recent losses, and not just because of the rotten economy, but also because it’s been more than 10 years since that 2000 top!

Ten years without progress is a long time, but it is not unprecedented.  The Dow first hit 1,000 at the start of 1966, but was soon constrained by the rampant inflation of the 1970s, as well as the need to “digest” the excesses of the 1960s.

The Dow didn’t succeed in breaking away from 1,000 until late 1982, nearly 17 years after it first touched that level.

Now, I don’t know if it will take 7 more years before we break free from Dow 10,000 and I really don’t care.  I know there will be plenty of bull and bear periods in the years ahead, because there always are, and if you can use sentiment studies to be an early buyer—and an early seller—you’ll be able to take home your share of the profits.

So today I suggest you lean toward optimism, precisely because so many people are pessimistic.

One final point: Some people will tell you, “It’s different this time,” and they will cite various fundamental facts—our huge national debt, Social Security, Congress, demographics, China, terrorism, peak oil, immigration, global warming—as reasons that investing in the future will not pay.

To which I say, “Baloney!”

Throughout history, there have always been people saying “it’s different this time,” but bull markets and bear markets have repeatedly proved the naysayers wrong.  And why?  Because bull and bear markets are driven by changes in perception that drive human emotions from the depths of despair to the heights of euphoria and than back down again, over and over.

Over the decades and the centuries, the economic facts change and the technologies change (note the comment of G.C. Selden about the quicker spread of information), but human nature is ever dependable in its variability.

And THAT is why I am confident that the market’s next major move will be up.

As you know, the market hasn’t exactly been cooperating lately. But I still managed to find a stock to tell you about today. It’s Las Vegas Sands (LVS), which has appeared in Cabot Top Ten Weekly eight times since 2006 and three in 2010 alone! Editor Michael Cintolo wrote this about it earlier this month:

“Las Vegas may get top billing in this company’s name, but its profit center is increasingly in the special administrative unit of Macao on the south coast of China. Like Hong Kong, Macao has a high degree of independence, and has emerged as one of the world’s gambling centers (and the only place in China where gambling is legal), providing Chinese high rollers with easy access to casinos like the Sands Macao, The Venetian Macao Resort Hotel and the Four Seasons Hotel Macao, Cotai Strip. The company’s Las Vegas properties (The Venetian Resort Hotel Casino, The Palazzo Resort Hotel Casino and The Sands Expo and Convention Center) contributed just 24% of 2009 revenues, while the Venetian Macao kicked in 44% and the Sands Macao 22%, making it very clear which way the balance of power is shifting in the gambling world. On July 28, Las Vegas Sands booked an impressive 1,600% jump in earnings in Q2, on a 51% jump in revenue. After-tax profits hit 8.1%, which was double the Q1 rate. Everything seems to be breaking in the company’s direction just now, and the opening of a new casino in Singapore is expected to heat things up even more.

“LVS is a volatile stock, and any story with implications for the health of the global economy will move it around. The stock made a nice March-April run, soaring from 16 to 26. Then came three months of trading in wide swings, although both lows and highs continued to rise. The July 28 earnings report didn’t produce a huge breakout, but trading volume rose significantly and the stock subsequently ripped past its June high. A dip to 28 is likely, and would be a prudent buying opportunity.”

Since LVS was recommend in Cabot Top Ten Weekly in March, it’s up 61%! And the long-term potential for LVS is enormous.

Click here to learn more about Las Vegas Sands and other leading stocks featured in Cabot Top Ten Weekly.

This week the folks in the Cabot office took a field trip down the road to Cabot Farm, where our company had its humble beginnings. We had a lovely lunch and got a tour of the grounds, complete with a stop to see alpacas (Max and Dakota, at right), turkeys and a flourishing vegetable garden. We also got to visit with Cabot’s founder, Carlton Lutts, who lives on the Farm.

This trip got me thinking a lot about Cabot’s history and I wanted to share some of it with you because it’s unique and a good story. The following is taken from a new page on our website about the company’s history:

From one perspective, the Cabot history is one of business.

To begin, you could start with Henry Lovewell Lutts, born in Kittery, Maine, in 1849. He was a self-employed house builder by trade, and the houses on Lutts Avenue in Kittery stand as a reminder of his work. Later in life, Henry built houses in New Hampshire and Massachusetts, typically moving into one once the roof was on and selling it when he could move into his next one.

His second son was Carlton Gardner Lutts. Thanks to his father’s occupation, Carlton moved 26 times as a child. But he was bright! An inventor and entrepreneur; he started businesses making and selling jigsaw puzzles and chemically treated paper roses that forecast the weather. But those were just sidelines. Carlton was a metallurgist by trade; he worked at the Boston Naval Shipyard and had a patent on a method of chain manufacture that brought in royalties.

His wife, Grace Alberta Smith of Salem, had a “money mind” from the start. She bought her first house at age 19, with her own savings, over the objections of the bankers who were unaccustomed to dealing with single young women. She and Carlton had three children. And in 1941, at Grace’s urging, they used the chain patent royalties to buy the old Cabot Farm in Salem, a 28-acre property that currently is home to roughly 30 members of the Lutts family. Grace was a lifelong investor in stocks, favoring the buy-and-hold method.

Their second son, Carlton Gardner Lutts Jr., was trained as an engineer, but his love was the stock market. In 1970, driven by a desire to share his thoughts on stock selection and market timing, he began writing and publishing the Cabot Market Letter (named after the farm) on the proverbial kitchen table. (The house above is where it all started!) As the years passed, his homespun wisdom and irrepressible passion helped hundreds of thousands of investors build big profits in great growth stocks like Fleetwood, WD-40, American Medical and Syntex.

Carlton’s second son, Robert, founded Cabot Money Management in 1983, to fulfill the demands of Cabot subscribers who had been asking for investment management services, and that business is thriving today, providing a full range of wealth management services to individuals and institutions.

Carlton’s first son, Timothy, joined the Cabot publishing business (by then incorporated as Cabot Heritage) in 1986 to contribute advice on investing in mutual funds, which were then enjoying a boom. As time went by, Timothy filled the Cabot stable with experts on value investing, international investing, Green investing, small-cap investing and more.

Carlton’s third son, Andrew, launched the Internet service company Net Atlantic in 1995, and today that successful company helps hundreds of organizations worldwide-including Cabot-communicate with their customers by email.

Meanwhile, at Cabot Heritage, Carlton and Timothy worked side-by-side for 18 years, transitioning the business into the digital age while remaining focused on the goal of serving subscribers with the best independent investment advice possible.

Carlton retired in 2004, but remains an advocate of growth stocks, momentum investing and market timing.

And Timothy heads Cabot Heritage today, supported by a loyal group of co-workers who are dedicated to providing investment advice you can trust, year after year, decade after decade.

(Tim’s daughter Chloe recently joined Cabot as well, as the editor of the Dick Davis Digest and Dick Davis Income Digest.)

I hope you enjoyed this bit of Cabot history. To see some more of the photos we took on the farm this week, check out our Facebook page!