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Strong Results Mask a Volatile Third Quarter© Sound Mind Investing | November 2010
The final result of 2010's third quarter was agreeable enough, though it masked the sharp twists and turns investors had to suffer through to obtain it. The market was sliding rapidly toward bear-market territory as the third quarter began, down nearly 17% from its April high. Little did we know that decline would end on the very first day of the quarter. It did, but not before triggering SMI's Bear Alert Indicator. Stocks started climbing the next day and continued on to a 7% gain in July. August brought about another sharp change in direction as the market fell nearly 5%. But September defied its reputation as the market's cruelest month by abruptly changing course once more, surging to a monthly gain of nearly 9% to finish the quarter. As the top line of the table below shows, SMI's model portfolios handled the quarter's twists and turns well enough, with both Just-the-Basics and Upgrading adding small additional gains atop the market's return. Both strategies benefitted from their allocations to foreign and small-company stocks, both of which outperformed large stocks.  The bond market continued its strong performance in the third quarter. Vanguard Intermediate Bond Index, one of SMI's recommended bond funds, was up 4.7% during the third quarter — and 12.7% year-to-date — helping to explain why the 2010 year-to-date figures in our Full Peformance Table actually increase slightly for Upgraders as you move from left to right across the portfolio allocations shown. It's unusual for bonds to outperform stocks over extended periods of time, but it can certainly happen for short stretches. ALL-CLEAR INDICATOR TRIGGEREDSMI's All-Clear Indicator sounded on October 15. This particular signal was unusual due to the fact that it wasn't preceded by an official bear market. Following the triggering of SMI's Bear Alert on July 2, the market failed to fall the additional few percentage points that would have taken it into official bear market territory (usually defined as a 20% drop from the previous high), giving us just the second case in the past 50 years — out of 13 signals — when the Bear Alert produced a false signal. To quickly review, SMI's All-Clear indicator was designed The recent confluence of strong buy signals — SMI's All-Clear Indicator, the annual seasonality buy signal, and the beginning of the election cycle's strongest period — certainly seems to indicate that the odds are unusually stacked in favor of owning stocks right now. As a result, we encourage readers to exit any temporary defensive positions they may have added when the Bear Alert sounded this summer, and shift to the maximum equity exposure called for by their personal long-term plan.
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