We don't have the best looking models - I'll leave that for the beautiful model on the cover of Sports Illustrated's Swimsuit edition, but ours are looking mighty good halfway through the first quarter of the year:

Before I go on, let me thank the vast majority of you who have continued to express their confidence in what I do. We hit a rough patch in the back half of 2011, but we have recovered and then some. Those of you who have followed me for all or most of the past almost four years since we launched Invest By Model know that I focus on the long-term. Until last year, we had experienced no more than a single bad quarter per year (relative to the market), so it was very disappointing to give up a big lead from late April and end up with a small loss in Top 20. I have no crystal ball, but I feel like we are in the type of market where stock-picking can really pay off, so I am hopeful that this great start is only the beginning. We are almost back to the peak value from April - with dividends, the S&P 500 is slightly higher now.
Top 20 soared this week, advancing 4.2%, which was 2.7% more than the S&P 500. For the month, we are 4.48% ahead of the market, and our YTD advantage is now 6.77% (15.33% vs. 8.56%). What worked for us this week? First, smaller stocks did do better than larger ones, but this only explains part. We had one stock, which had been problematic but in which I have maintained confidence, surge about 24%. It's back to about where it started the year. Our recently added Energy stock also had a good week, though it remains below our initial buy price. We had several other very strong stocks. One that I will call out is a Technology stock that enjoyed a multi-year breakout. This stock remains extremely undervalued in my view. As I look at our holdings, I don't see any stocks that need to be sold due to unattractive valuation. On the other hand, I have several new ideas I am contemplating adding.
Conservative Growth/Balanced improved 1.35% this week, which was about .5% better than the 60/40 blend of stocks and bonds. Our advantage in February is about 0.6%, and the YTD return of 7.7% is 2.4% better than its benchmark. Bonds were flat for the week, so that had no impact on the model. Our overweight in stocks (near our 75% maximum exposure) helped. Our two Retailers were the standouts.
Sector Selector ETF advanced 1.75%, which beat the S&P 500 by about 0.3%. It is now ahead of the market by more than 1% in February. So far in 2012, it is beating the market by about 5.1% (up 13.7%). For those paying attention, what worked the best this week is one of our most recent additions. We have added a 10% position roughly in the past couple of weeks to this sector of the market. Our Emerging markets and Small-Cap exposures helped, while Financials, one of our largest positions, tracked the market. SSETF is trading above the launch value in late April despite a very rough summer.
Market Outlook
The S&P 500 closed at its highest level since 2008 today, taking out the highs from 2011. While I am somewhat cautious in the very short-term due to the market being overbought, I am not expecting much of a pullback. I am keeping it brief tonight: I am still expecting a move to 1600 or so - an all-time high on the S&P 500.
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Final Thought
Why do stocks go up? In the very long-run, stocks track earnings, because earnings ultimately convert to dividends, but, in the short-run, sentiment plays a great role. One of the great advantages I enjoy as an author on Seeking Alpha, a model portfolio provider and a consultant to money managers is that I get a pretty broad view of what others are thinking through feedback. For instance, we lost many subscribers to Top 20 as performance fell in absolute terms (sadly, this is what happens - people hide under their desks apparently when the market is tough). As badly as I feel for those who react, it serves as a valuable contrarian input for me.
So, what is sentiment saying these days? Ask me, and I think most investors are negative on stocks. I was at a dinner party and seated with perfect strangers. When I was asked what I do, I responded, and the others at the table couldn't change the conversation quickly enough! Now, I don't go solely on my own observations. There is concrete proof that the mass market hates stocks - the data is in mutual fund flows. People pulled out money hand over fist over the past year, but the tide is turning. Just recently, the flows have reversed - very bullish.
Now, some will point to sentiment surveys as being negative - too much bullishness. My response: Don't ask the pros, ask the Joes. Joe investor is not even in the game! I have been talking about strong technicals, compelling valuations and challenging (but perhaps improving) fundamentals. Folks, it's all lining up.
Regards,
Alan Brochstein
www.InvestByModel.com