Despite an ugly start to the week and a lackluster end, the middle of the week rocked. For the models, it meant higher valuations, but we had mixed performance. The model that seems to be working the best, Conservative Growth/Balanced, fared the best, while the other two were essentially in line with their benchmarks:
Top 20 rose 2.13%, while the S&P 500 increased 2.22%. Our YTD lead remains a very modest .52%. For the week, we had 4 stocks increase by 5%, but we also had 5 decline. I was glad to see one of our better performers was the name we bought Monday. One of our larger positions, which has been one of our worst performers this year, had a good week too. The softness in the 5 losers wasn't related to any news with the exception of one company that reported, but I would note that 4 of the 5 are down year-to-date. While I indicated at the beginning of the year that I thought this year would be more challenging for the model than the previous years due to the lack of exteme mispricings that were so rampant after the crash, I remain disappointed with where we are. I have made a few mistakes this year, but I am mostly satisfied with our current positioning. Looking back to how we performed from Labor Day last year into year-end, I am quite confident that we could meaningfully outperform the market over the next five months, though my original goal of beating the S&P 500 by 12% that I shared at year-end may be out of reach without a lot of luck. Rather than manage to that goal, I continue to focus on positioning the portfolio for superior performance over a one-year period.
Conservative Growth/Balanced, which turned three this week, had a very strong performance in light of the sharp rally in the market that might have left it behind ordinarily. CG/B rose 1.88%, while the stock/bond index increased 1.29%. Here, we were helped by our underweight in bonds but also some strong stock performance. While we did have one stock drop by almost 5% (the one to which we added on Friday), also had 4 increase by 5% (including the one we trimmed on Friday). We were helped by Technology, including the name we added on Monday. I am pleased that we are outperforming the benchmark by 3.2% so far in 2011.
The Sector Selector ETF model, which is almost 3 months old, continues to tread water since the launch. Here, we have been burdened by an early commitment to Financials as well as some slippage in Emerging Markets, while our high exposure to Technology has helped. Otherwise, our structure has been alright. For the week, the model increased 2.26%, slightly more than the S&P 500, with Financials and Technology leading the way. Despite the slight performance drag over the past three months, I am optimistic about the prospects for the model.
Outlook
This week's action was constructive, with the NASDAQ continuing to lead the market and the NASDAQ-11 (the biggest stocks) actually breaking to new highs. I continue to expect 1500 on the S&P 500 by year-end, with a likely momentum over the balance of the summer as well. M&A activity remains strong, suggesting that we should continue to focus some of our attention on potential acquisition candidates among smaller and medium-sized companies. One of the most encouraging things about this week was the tone of earnings reports. While many have feared that companies might reduce their outlooks, the results have been generally strong and the outlooks have increased as frequently as decreased. Companies seem to have addressed rising input price pressures from earlier this year and are navigating the soft demand reasonably well.
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Have a nice weekend!
Alan Brochstein
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