The path of least resistance remains a quiet but persistent one, with stocks creeping higher on an absence of bad news. Here is how the models look as of 8/17:
This was a stellar week for Top 20, with the model gaining 2.76% while the S&P 500 increased 0.96%. We now have a solid lead for August, up almost 2X the market at 5.99% vs. 3.03% and even recovered fully now from the weakness relative to the market in July. So far in Q3, the model is up 4.58%, which is 0.12% more than the S&P 500. As I have been saying, smaller stocks have been lagging, and this has certainly been one factor. In Q3, the Russell 2000 is up only 2.83%, so I am glad to see the model, which consists of a majority of smaller stocks, now well ahead of that benchmark. In 2012, the R2000 is up 11.6%, so our performance lies between the two indexes. Last week saw some huge pops in several of our stocks, while this week's performance was more even. There were no moves of 10%, but we had four increase by 5% or more. No stocks declined more than 3%.
Conservative Growth/Balanced moved back into the lead for the year relative to its benchmark. For the week, the model beat the 60% stock and 40% bond index by 1.68%, rising almost 2% compared to a 0.29% increase inthe benchmark. Falling bond prices helped, as the model has the bare minimum there. Also, one of our largest positions had a fantastic reaction to quarterly earnings and a big dividend hike. Smaller stocks did well too. In August, the model is ahead of the benchmark by almost 3%, and it leads in Q3 by 2.26% with a 5.08% return.
Sector Selector ETF had a marginally better weak, rallying 1.22%, or 0.25% better than the S&P 500. It is ahead in August by 1.19% but is still trailing the market slightly so far this quarter with a 4.21% gain compared to the 4.46% gain for the S&P 500. Here, we were helped by the Small-Cap exposure, but Emerging Markets and Energy were a drag on returns.
Market Outlook
I am keeping it short today. I began the year bullish and was cautious in late March (though not enough!). While I may have been too optimistic in establishing a 1600 target for 2012 on the S&P 500, I think that we could get there and are likely to get towards 1500 in short-order. The technicals are shifting to very favorable with the market having gotten within 0.5% of the four-year highs set earlier this year. This week, we cleared the early May levels where the market failed after rallying following the pullback in April. In my career, I have rarely seen sentiment among investors so poor. The S&P 500 is up more than 14% yet people act like we are in a bear market.
This week, something changed. Big-time. Bonds were routed, and this is a good thing. Treasuries have traded at irrational levels because they are viewed as protection against disaster, but the need for protection is falling fast. At the beginning of the month, the yield of the 10-year was below 1.5% after touching an all-time low of 1.4% in July. It closed today at 1.82 and touched as high as 1.86% this week. This is a sign that the big-money guys are giving up their "end-of-the-world-as-we-know-it" bets. The next stage is for money to flow into stocks. So far, it's been an absence of selling rather than buying, at least as evidenced by the very low volumes all around the world.
So, stick with it, as I think my call for Small-Caps to surge has begun to play out, perhaps a little earlier than I thought. I am looking for a big move up following Labor Day when the hedge funds set up to generate their performance fees. At the end of July, they were up only 3% on average and have a lot of work to do! I think that their appetite for risk will be increasing, and this bodes well for smaller stocks. Notice that I am not making any predictions about the economy looking stronger, but it likely will, and this will be the difference between hitting 1500 or the 1600 I have predicted. NO ONE thinks the economy can actually post good numbers! From a technical perspective, there's nothing better than coming out of wide base like this - it suggests that the follow-through could persist. I will be watching for signs of stocks being overbought or extended, but I don't think we will need to worry until late October or early November.
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Final Thoughts
We have many new people on free trial, so I want to remind any active traders out there that I offer a private blog, My Own Analyst (www.MyOwnAnalyst.com). Here, I share updates on stocks in the model, but I also discuss so much more. One of the favorite features of subscribers is the "Short-Term Trade Recommendations", which are well-defined specific ideas. Typically, the upside is set for 10% or so, with the downside at 2.5% on average. All of the trades expire upon hitting the target or the stop or at the end of two weeks if they don't touch the triggers. We have been extremely successful, and I am happy to share the results dating back to February that indicate a 0.8% average gain on 158 trades. On a portfolio-basis, this works out, before considering commission costs (and the cost of the service), to a gain of nearly 30% in less than 7 months. You can learn more about it and download a brochure if you are interested. I have unlocked it temporarily if you would like to take a peak. If you would like a free trial for the rest of August, email me at [email protected] and I can get you set up.
Have a great weekend!
Alan Brochstein, CFA
www.InvestByModel.com
