Mutual Funds Research Newsletter
http://funds-newsletter.com
Copyright 2008 Tom Madell, PhD, Publisher
Aug 30, 2008

Contents:

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Alert!

As a subscriber to our Newsletter, we promised to alert you when significant changes have occurred affecting buy and sell decisions. This is to inform you that a positive change has now occurred. As of the close of Aug. 2008, we are highly recommending that investors regard Large Cap Growth (LG) funds as well situated for good positive performance (not just less negative than other categories as has been the case recently) over the next 1, 3, and 5 years.

LG funds already have a high endorsement in our current Model Portfolio at a recommended 22.5% of your stock portfolio, along with an equal allocation to Large Blend funds, as well as an even higher allocation to International funds. However, these endorsements are made relative to other categories. That is, they do not necessarily imply a positive return but only a better return relative to other stock categories. Since we entered a bear market last Oct., LG has indeed shown better returns than other major categories over the last year, although all of the major stock fund category returns have been negative and returns for Large Blend, and particularly, International funds have been hit hard.

Last month's newsletter was one of our most important, although not all subscribers may have seen it. In it, we pointed out that all the major fund categories including LG were "sells", according to our research-based analysis. But in the last 4 weeks, LG has now become a "hold". What that means, as we spelled out in that newsletter, is that the category may be considered suitable for not only holding, but new purchases as well. In fact, the more LG might slip in the short term, the more our data suggest it will look attractive long term. That is why we especially recommend LG as a favorable category for long-term investors.

While these changes do not represent as good an opportunity as our "buy" signal would, it still means that on a long-term basis, returns are likely to be good. I would especially recommending buying LG on dips. Note that we have not changed our allocations as shown in our in our July Newsletter. Any changes will be presented in our Oct. Newsletter toward the end of Sept.

When we look back at data from the 2000-2002 bear market, we see that the overall stock market started turning upward about 6 months after our data would have first gone from a sell signal to hold. Therefore, if things are similar this time around, it may also take about 6 months for LG to really start to do well in terms of generating positive returns. However, if you are a long-term investor, you may want to dollar cost average into the category over that period because the average 1 year return for our hold stock funds over recent years was 10.7%, as pointed out in the Aug. Newsletter. We do not recommend purchasing other categories of funds at this time because the 1 year average return for our sell classified funds was -11.2%. (See "How Low Could This Bear Market Take the Overall Market?" below for some thoughts on this important question although we expect that certain fund categories, particularly LG, might still show positive returns while the overall market is declining.)

How Low Could This Bear Market Take the Overall Market?

Speaking of bear markets, we received an interesting email from a highly astute gentleman who first alerted me to the dangers that were building up in the housing market way back around 2005! Two years before the crisis actually hit, he basically foresaw that such a crisis would occur and that when it did, the entire economy would suffer. His arguments were so compelling that I began to change some of my thinking into a high degree of agreement with his analysis. This contributed to more caution on my part, in spite of how well the economy seemed to be doing in the following two years. His Aug. 19th email posed the following question:

This is obviously an important question, although admittedly from a bearish perspective. If we, as some experts predict, still have quite a way to go in this bear market, then even long-term investors might want to still consider taking a little of their stock investments off the table until the worst has apparently passed.

Here is what we answered also on Aug 19:

As an afterthought, it is possible, of course, that the overall market will drop no further than the 20% it had on the day of our answer. But we consider this unlikely given that nearly all categories of stocks are currently still in sell territory as defined by our research. Also, the economic fundamentals do not look good going forward at least until well into 2009 at the earliest. So the probability of the drop stopping at 20% is not an outcome we feel will actually happen, in spite of the fact that there are many highly aggressive investors that may create temporary bounces in the market that may appear to be the end of the bear market. (This is what happened between Mar. and May; we correctly pointed out at the time that it was likely a "bear market rally".)

Change Is Upon Us (Revisited)

Were you a subscriber as recently as Oct. of 2007? If so, you might remember we made some specific predictions about how you might profit from what appeared to be the start of a changing market environment a little less than 1 year ago. (If not, you can review what we said back then along with most of our previous Newsletters going back to our first Newsletter in mid-1999 in our Archives.)

Here are a few of the things we said in that Oct. issue.