Despite the sharpest single-day down move in 15 months on Wednesday, stocks advanced this week and are now extending on their October gains eleven days into November. We had mixed performance in our models:
Top 20 benefited from two stocks performing well after earnings, an outcome that we seemed to lack over the past month. I am pleased, because one of the stocks has been one that was very challenging, and I believe that we made the right decision to stay with it. The other is a more recent add, so I am happy to see it work over such a relatively short time-frame. I ended up raising my one-year targets on both of these stocks by about 5%. On the other hand, a third company reported a good quarter in my view yet fell sharply. For the week, we slipped compared to the market, with the S&P 500 rallying .94% while Top 20 gained only .08%. The culprit? Weakness among smaller stocks in general, especially on Wednesday's plunge. Month-to-date, the model has lost about 1.2% compared to the S&P 500, while we are now 0.2% behind the index in Q4. I continue to have several underperforming stocks under close review for replacement but note that tax-loss selling in general is making this a bit challenging, but I expect that it will be mostly complete by the end of this month. My goal in this model is to position the portfolio best for the coming year, though I do hope to recover some (or, hopefully, all) of the underperformance in the coming weeks.
Conservative Growth/Balanced also benefited from the Large-Cap Tech stock that reported and rallied as well as the retailer we recently repurchased. For the week, it gained 1.61%, which is substantially better than the 60% stock and 40% bond index. The model recovered all of the prior week's underperformance and is now up .36% for the month and .86% so far in the 4th quarter relative to its benchmark.
Sector Selector ETF was burdened by weakness in emerging markets and Small-cap, losing 0.03% this week. The almost 1% underperformance vs. the S&P 500 leaves it 0.84% behind the index in November but 1.05% ahead for Q4.
Market Outlook
I shared a forecast for the balance of the year as well as for year-end recently and continue to expect a good finish to 2011 and the potential to rally to 1600 on the S&P 500 in 2012. This week's action encouraged me, as bad as it felt on Wednesday. Why? We are rapidly adapting to an environment of European headline risk. Make no mistake, the risk level in the market is high, but the problems are well known and increasingly better understood. The best rallies historically have been built on a "wall of worry", and this appears to be what has been going on for the past six weeks.
Articles
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- BDC Review: SLRC - Seeking Alpha
Final Thoughts
First, I know that we have active military members subscribing to Invest By Model, and I presume that several subscribers have served our country. On this Veteran's Day, I want to thank you.
I have shared bullish thoughts recently after a very challenging year for our markets on many fronts. I am not always bullish, and I have no real incentive to say anything but what I honestly believe. With respect to Invest By Model, subscribers pay a fixed amount for access to our ideas. While it's pretty clear to me that the interest in subscribing correlates well with how the market has been doing, subscribers pay the same $20 per month (or $10 for the SSETF) whether they choose a single idea, replicate the portfolio on $25,000 or apply it to a $500,000 account.
A lot of times when talking heads on investment news shows discuss the market or when investment advisors speak about the prospects for investment, they have a vested interest in convincing you to commit more resources. Why? Because for every dollar you give them to manage, they get a penny or so. If you choose to invest more while using our service, you don't pay even a penny extra.
Additionally, many investment advisors offer only long-only products, so they are forced (sub-consciously) to tend to be more optimistic in order to justify their existence. While I admit to not having a "short product", I have committed to getting one in place before the next bear market. I do have the very easy ability to have significant cash in 2 of the 3 models, and when I move that direction I will have the new hedged or model that will allow me to offer a product that can potentially benefit from declining markets.
I say this because I am VERY BULLISH. I could be dead wrong. This year I have been certainly off on my timing with respect to being optimistic. If I am wrong to advise subscribers to be optimistic, it won't be because I compromised my intellectual honesty.
Let me conclude by saying that we are in the inverse of the bubble from 1999. Many thought it was solely a Tech bubble, but that isn't the case. Investors absolutely loved Large-Caps in general. Companies as boring as Coca-Cola (KO) or Walgreen's (WAG) commanded PE ratios in excess of 40X forward expected earnings. And everyone wanted to own them, driven by greed and by extrapolating past success into future gains. Today, despite dramatically lower interest rates (as measured not by the outrageously overvalued Treasuries but rather the bonds of the same corporations with low equity valuations), typical multiples are stupidly low in my view. I understand how a "lost decade" can make it seem like stocks aren't a good vehicle for wealth creation, but I think those potential investors locked out of the market by their fear are doing themselves an equal if not greater disservice to those who invested blindly 12 years ago.
Best Regards,
Alan Brochstein
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