Absolute Return Portfolio Management LLC

My long-term outlook for the market remains positive. The recent correction in equities and commodities has alleviated some of the speculative fever and will allow equities to push higher still.

The most interesting thing my analysis is showing me is that we are beginning to see the early stages of distribution in Small and Mid-Cap stocks. This means that institutional smart-money is moving to the safer large-cap stocks.

There are a couple reasons why this might be occurring. First, there is the building perception of higher equity market risk which leads institutional smart-money to move towards the better liquidity and relative safety of larger companies. Given the elevated levels of investor bullish sentiment, smart money moving away from higher risk small and mid cap growth stocks seems perfectly logical.

The second reason is that the perception of relative value of small vs large company stocks is beginning to favor large-company stocks as better values. Given the large rally in small and mid-cap stocks, and their significant out-performance of large-cap stocks, this premise has some weight behind it.

What is more important than the "why" is the fact that we have to be on the look out now for a transfer of leadership to the large-cap stocks.

Our Domestic Equity model will automatically handle this for our managed accounts. The value segment of the growth vs. value spectrum is beginning to show some strength in the mid and large-cap value sectors. Therefore, Mid-Value and Large-Value may become the next leaders.

Today, the best performing style boxes remain the Small-Cap and Mid-Cap Growth segments. These two are the top of the risk spectrum and their leaderships bodes extremely well for the market. However, we will need to watch for a change in relative performance and whether mid/large value assumes the leadership position.

So, after many, many years of out-performance it is clear that allocations to International Equities should be reduced to a minimum with the proceeds coming back home to the Domestic Equity market.

The Regional model is long Asia, Emerging Markets and Europe.

We are long International investment Grade Bonds. The renewed weakness in the US Dollar (and commensurate strength in foreign currencies) provides a nice tail wind to our position.

We are long High Yield Bonds.

Our models are long Commodities and REITs. The strength in Commodities usurped Gold Bullion as the latter experienced a shallow correction. The long-term uptrend in Gold Bullion is still intact, however, and I won't be surprised is the models, once again, look to Gold in the coming months.

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