While it wasn't as good a week as I would have liked, I'll take it. This was one of the quarterly options expirations that can lead to crazy moves in stocks and in the whole market. All in all, it was a bit choppy, but seeds of potential recovery in stocks may have been planted. Here is how we look:
Top 20 improved slightly on the week, increasing 0.8% while the market increased just 0.1%. Not much of a rally! For the year so far, we remain behind by a little over 1%. As a reminder, after an extremely strong finish to 2010, we got a bit behind early in 2011 before rocketing to a substantial lead at the end of April. The past 6 weeks or so have been very tough, with some of our smaller stocks suffering from poor liquidity while some of our "value plays" have been shredded. Today was the first of what I expect will be several tweaks to the portfolio. I have a few other names that I am contemplating, with an emphasis more on growth rather than value. While we have a few companies with deteriorating fundamentals, most of the stocks are still seeing rising earnings estimates. Valuations look exceptional, and most charts are still intact in my view.
Conservative Growth/Balanced bounced back nicely this week, rising 1.3% compared to an increase of just 0.1% for the stock/bond index. Our lead in 2011 over the benchmark increased to 1.7%, which is disappointing to me given where we were several weeks ago. For now, we remain pretty fully invested in stocks (75% is our max). While several of the names looked extended or overbought a few weeks ago (we sold some of them), the portfolio looks to be in good shape now. I have a retailer I am considering adding, but I am watching it for now.
Sector Selector had a negative week relative to the market. In fact, the model actually declined .4%. I am rethinking our large commitment to Large-Cap Technology, as it appears that the outlook for these companies isn't quite as bright as analyst estimates imply - a potential value trap. There are a lot of very cheap names, but they just keep getting cheaper. During this past week, we were helped modestly by our exposure to Financials but hurt by Emerging Markets and Mega-Caps.
Market Outlook
The market hasn't hit the official 10% mark that would denote a "correction", but it got pretty close. Many stocks have certainly pulled back substantially more. Pessimism is certainly rampant. While I continue to believe that most of this pullback is over, I don't have a lot of conviction yet that the low is actually in. Some parts of the market have already taken out the lows from March, but the overall market remains just above those levels. It seems very possible that we may eclipse those levels (1249 on the S&P 500 - less than 2% away). There are 10 economic sectors - here is the scorecard for whether or not they have taken out the March lows already:
- Energy - yes
- Materials - yes (barely)
- Industrials - yes (barely)
- Consumer Discretionary - no, but it's close
- Consumer Staples - no, not even close
- Healthcare - no, not even close
- Financials -yes
- Technology - yes
- Telecom Services - no
- Utilities - no
The key to winning since late April has been to own Staples, Healthcare, Telecom Services and Utilities. CG/B had some overweighting of Healthcare, but clearly the models haven't been positioned for a slowdown in the economy that investors (or traders) are anticipating. I didn't see the double-dip coming last year, and I don't see it this year. Japan's natural disasters have wreaked havoc on supply chains around the world, and our own floods too have caused some issues. While the economy seems "stalled", especially when it comes to jobs, I have been encouraged by aggregate income data. Clearly there is a lack of confidence, and it is reflected in hiring trends and certainly in demand for stocks. Unlike last year, I don't expect this malaise to linger. If we don't see some improvement shortly in the stock market, there may be some more selling ahead, especially if we move back into the red for the year, like we did briefly in March. I still believe that we can get the 20% gains that I predicted, but I am close to questioning my assumptions (which were 8% earnings growth and a 12% PE multiple expansion).
Regards,
Alan Brochstein
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