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Room to Grow: Sentiment Augurs More Market Gains: Searching for Alpha for October 2010

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Last month’s Searching for Alpha newsletter listed several reasons why I feel stocks are heading higher. Even after a spectacular September, the market looks poised for further gains.

Besides valuation and low interest rates, the biggest positive in favor of equities is the current state of investor sentiment. According to the Investment Company Institute (ICI), only 30% of mutual fund investors were willing to take “substantial or above-average risk” in May 2010. In 2008, the number stood at 37%.

According to the ICI, the decline in risk tolerance was “widespread across working age mutual fund investors.” Meanwhile, the more well-to-do older demographic continues to shy away from risk at a much great pace than younger market participants.

What this means, of course, is that the average do-it-yourself investor is missing the current rally. As stocks heat up, the retail crowd will succumb to the buying pressure, pushing stocks up even higher. The trick is to make the move ahead of this pile of cash.

It’s likely that much of the liquidity needed to buy will come from government bond funds. Investment advisors are cautioned to add to such positions carefully in the coming months.

The Monthly Index Report for September 2010

Index

Sep-10

QTD

YTD

Description
S&P 500 Index*

8.8%

10.8%

2.3%

Large-cap stocks
DJIA*

7.7%

10.4%

3.5%

Large-cap stocks
Nasdaq Comp.*

12.0%

12.3%

4.4%

Large-cap tech stocks
Russell 1000 Growth

10.7%

12.9

4.4%

Large-cap growth stocks
Russell 1000 Value

7.8%

10.1%

4.5%

Large-cap value stocks
Russell 2000 Growth

14.2%

12.8%

10.2%

Small-cap growth stocks
Russell 2000 Value

10.7%

9.7%

7.9%

Small-cap value stocks
EAFE

9.8%

16.5%

1.5%

Europe, Australasia & Far East Index
Barclays Capital U.S. Aggregate

0.1%

2.5%

7.9%

U.S. Government Bonds
Barclays Capital U.S. High Yield

3.0%

6.7%

11.5%

High Yield Corporate Bonds
Calyon Financial Barclay Index**

1.6%

2.6%

6.4%

Managed Futures
3-mo. Treasury Bill

0.0%

0.0%

0.1%

All returns are estimates as of September 30, 2010. *Return numbers do not include dividends.

** Returns are estimates as of September 29, 2010.

Ben Warwick is Co-Chief Investment Officer of Aspen Partners, LTD. He can be reached at [email protected].