It was a great week for all the models - the year is off to a nice start:

Top 20 rose over 3% in the past four days, easily beating the 2% return for the S&P 500 and building a lead for the first three weeks of the year. The model really struggled from May through November, but it has regained some ground over the past two months. We have a lot of wood to chop, but this has been happening without the benefit of a big move in Small-Caps, which I think is coming soon. Of course, not everything is working, but a few things are working well. We had 3 buys and 4 sells today (only one new name - the rest were trims/adds). As a reminder, I always post my rationale for doing any trade before the market opens on this blog.
Conservative Growth/Balanced had a stellar week, rising 3.15% compared to an increase of just 1.07% for the 60% stock and 40% bond index, which was weighed down by weak bond prices. We remain very fully invested in stocks (near the 75% maximum) and near the bare minimum (10%) in bonds. We had a good week due to the strength in Technology, but other things worked well too. While we have a 1.78% lead so far this year, I am somewhat cautious that a rallying market will be tough to catch with "conservative" stocks. Hopefully our high weighting will make up for it.
Next week marks nine months in the short life of the Sector Selector ETF model. The first five months were absolutely horrible, but the model has been making up ground steadily. This week was quite strong, with the model rising 2.8%, 0.86% better than the S&P 500. All of the big bets are now working, especially Emerging Markets and Financials. I am hopeful that our largest bet (Small-Caps) will help us make up the remaining deficit since inception. Up 7.5% so far this year, the model is beating the market by almost 3%.
Market Outlook
The bullish thesis I have been describing is getting a bit easier to defend. Stocks are cheap still, fundamentals remain challenging (perhaps less so) and the technicals are improving. Smaller stocks could really pick up some ground. So far, they are doing a bit better, but not as much as I thought, especially given the improving sentiment. Meanwhile, QQQ moved this week to new highs, and the DJIA is very close to its recovery high set last April. I get excited as I look through many of the holdings in the models, as they remain well below prior peaks. I watch for things like being "overbought" or "extended", technical terms to describe scenarios that can end trends, but I am not seeing much to make me cautious at this time.
The past two years have seen good starts to the year, with rallies persisting to April before huge plunges in the summer with rallies into year-end. The "consensus" going into this year was that the year would start weak but end strong. Well, the start turns out to be the best since 1987 - a very strong January. I expect that most investors aren't yet embracing the rally, but stocks like Microsoft, Apple, Intel and many others are giving us the "tell".
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Happy Chinese New Year!
Alan Brochstein, CFA
www.InvestByModel.com