Managers’ Special Report: August 2010 overview

Since our last report, the major U.S. market indexes remain in a trading range between the February 2010 lows and the April 2010 highs. Seven months into 2010, the S&P500 index is basically flat year-to-date. Small cap U.S. stocks have led, and foreign stocks have lagged. Most categories of fixed income continue to perform well in 2010, despite low absolute yields.

Managers’ Special Report: Buys & Sells – Core Equity Funds

Based on data from August 3 , 2010

Core equity funds (Class 3 for newsletter subscribers)

After several months of relentless declines, the euro finally rallied against the US dollar, bringing a couple of European-focused funds up the ranks. Recent rising stars also include dividend and value strategies, and a mix of mid-cap and large-cap funds and ETFs. In our newsletter’s model equity portfolio, most of our existing positions are still ranked as buys or holds, so this month we are only selling one core domestic value fund and investing the proceeds in foreign value funds.

Managers’ Special Report: Buys & Sells – Speculative Equity Funds

Based on data from August 3 , 2010

Speculative equity funds (Class 1 and 2  for newsletter subscribers)

There were many trades among our speculative fund holdings this month. The domestic trend reversed last month, as foreign funds outpaced their U.S. counterparts, and we added positions in highly ranked emerging markets funds and ETFs. We favor funds and ETFs that invest in multiple countries, rather than single country funds.  Among sector funds, gold fell sharply in July and was replaced by higher ranked real estate.

This month, we are selling gold and some small cap funds and ETFs, and adding substantially to emerging markets. We are also adding to mid-cap growth, and some REITs.

Managers’ Special Report: Buys & Sells – Flexible Income Funds

Based on data from August 3 , 2010

We continue to benefit from a diverse portfolio of fixed income funds and ETFs including exposure to short and intermediate term bond funds, mostly consisting of  high quality corporate bonds, as well as some exposure to high yield corporate bond funds. Last month, we increased exposure to strategic, or multi-sector bond funds, whose managers have the flexibility to adjust to a dynamic environment.  Strong performance from these “go-anywhere” managers has driven them up in our scoring system. This added to our performance in an environment that was otherwise flat for the benchmark aggregate bond index.

We have moderately increased our portfolio duration since our last report, selling some shorter-term funds and increasing our current yield.  We have also added to US dollar-hedged foreign bond fund.

Managers’ Special Report: Tactical Model Perspective

Based on data from August 3 , 2010

As the market entered 2010, our models indicated that stocks were generally over-valued and investor sentiment was too complacent (see past comments for details). The rally was still intact, but was showing signs of moderation after an incredible run off the March 2009 lows.

The market hit its first speed-bump between mid-January and early February, with the S&P 500 index correcting by about 8% before rallying to new highs in April. By late April, our measures of sentiment and valuation were again very stretched. The next correction was stronger and deeper, as the S&P 500 index lost 17% from peak to trough, and many foreign and small company stock indexes dipped into bear market territory (decline of 20% or more). Then, just as investors began throwing in the towel, citing a dow theory sell signal of “death crosses” (when the 50-day moving average crosses below the 200-day moving averages) and renewed fear of a double dip recession, the market bounced in July, pulling back up to flat for this year-to-date.

The year has been quite a roller coaster ride. Our tactical portfolios were much less volatile and boast modest gains.

Investor confidence was badly damaged by this sharp correction.  Our measures swung sharply, from excessive complacency to excessive pessimism. In our tactical portfolios, we hold considerable cash, and, until the market breaks out to new highs, we are maintaining a partial hedge.