Absolute Return Portfolio Management LLC

My long-term outlook for the market remains positive. Last month I predicted that investors were are about to enjoy an excellent summer rally. After some backing and filling through June the markets established a tenable bottom and have taken off in the last few days.

The two factors that led me to conclude that a significant rally in stocks was imminent are still in place. First, investor sentiment became highly anxious as occurs near market bottoms. Second, market internals developed a positive divergence with prices.

Remarkably, even with equity prices near all time highs for this bull market we saw very high levels of anxiety. In fact, the AAII weekly survey of market outlook among its members reached a high of nearly 50% Bears and about 25% Bulls. This nearly 2 to 1 ratio was quite extreme and illustrated a rare level of anxiety and concern as frequently occurs near intermediate-term market bottoms. The most recent similar reading occurred last summer following the "Flash Crash" which kicked off a multi-month rally.

Market internals at the recent bottom were, and remain, exceptionally robust.

Technically, the market has just exhibited a significant positive divergence with market internals. What this means is that even though prices earlier this week reached the same levels as the bottom at mid-month, indicators of internal market strength did not fall back as far. This "positive divergence" between prices and indicators of internal market strength are textbook indications of an imminent rally. And the markets have soared in the past few days kicking off the rally predicted in my last newsletter.

I continue to recommend investors use a "buy the dips" mentality and not be shaken from that position. There is no evidence of long-term deterioration in stocks that would be a harbinger of a long-term or more serious decline. In fact, quite the opposite condition exists suggesting that the bull market advance is healthy and will continue higher in spite of challenging economic and political climes.

Mid-Cap Growth is apparently the sweet spot right now offering both better liquidity than small-caps while retaining some "growthy" characteristics investors are looking for. Without a question this is the strongest area in the Equity style arena.

Large-cap Growth stocks appear to be forming a bottom with respect to their relative performance. They have under-performed their Small and Mid Cap Growth counterparts by a significant margin this entire bull market.

The value area, regardless of capitalization, continues to struggle. This suggests that investors are willing to pay a premium for more both more solid and more predictable earnings streams; hardly a surprise in such an uncertain economy.

What remains remarkable about the performance of international equities is that they have the tail wind of a weak US Dollar helping them yet they have not been able to establish a marked out-performance compared to US Equities even with that advantage.

The Regional model is long Europe, Japan and Latin America.

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