A Case Study of Asset Class Rotation From February 2000

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A Case Study of Asset Class Rotation From
February 2000 July 2002

• Your Mutual Fund and Retirement Plan Portfolio
  Didnt Have to Suffer

Presented by Philip Rongo, ChFC, CLU
Douglas A. Rongo, EA, CFS
Morristown Financial Group, LLP, Registered
Investment Advisor 65 Madison Avenue Suite
400 Morristown, NJ 07960
Securities Offered Through Linsco/Private Ledger,
Member NASD/SIPC
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Investment Myths of the 1990s

• Pie Charts and Asset Allocation Models
• Phrases such as Buy the Dips,
  Diversification, and Buy and Hold for the
  Long-Term
• Its time in the markets, not timing the market.
• Risk Categories such as Conservative, Moderate,
  and Aggressive

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• Beginning in early March 2000, the pieces of the
  investment puzzle came together to show a clear
  and decisive change in asset class favoritism.
  There were tools available to analyze this
  momentous shift that suggested high risk in the
  Large Cap Growth and Mid Cap Growth asset
  classes.
• The market action since then has shattered the
  myths shown on the previous slide. More
  important questions for then, now, and the future
  would be as follows
• Should we attempt to accumulate wealth, or
  preserve wealth?
• When did the risk level change?
• Should I have been more in, or more out of the
  stock markets beginning in March 2000?
• In the next few pages you will see some of the
  indicators of risk we use. You need to focus on
  the point of whether or not your current
  financial advisor is/has been data driven, as
  we are, or myth driven, as many of our
  competitors are, and making the right risk
  management call.

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A major shift in stock/mutual fund favoritism
occurred as the calendar changed to the year
2000. Y2K, as it was known, did not suffer from
computer crashes as many had predicted, but a
dramatic breakdown in the Large Cap Growth, and
Mid Cap Growth stock/Mutual Fund Asset Classes.

• Here are the purposes of this presentation
• Follow up on the previous slide show concerning
  investment risk management
• Show the clear signs of breakdown in the Large
  Cap Growth and Mid Cap Growth (LCG and MCG)
  mutual fund asset classes
• Show the clear signs of coming favoritism of the
  Small Company Value (SCV) mutual fund asset
  class
• Inform you, as a do-it-yourselfer, or your paid
  financial advisor must make the correct
  investment risk management call on an on-going
  basis.

Data courtesy of Dorsey, Wright, and Associates,
and Lager, and Co. Information herein is
believed to be reliable, but not guaranteed.
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At the left is the Bullish Percent Chart for
Large Cap Growth Mutual Funds. Notice the 2.
That shows that in February 2000, 98 of the LCG
funds were showing buy signals on their long term
Point and Figure charts. You may remember the
television commercial with Stuart from that
internet brokerage firm talking about how he
wanted to take the market by its ankles shake
it around throw it on the ground, and stomp on
it. If Stuart continued to hold these types of
stocks and funds, he probably would have lost
that fight.
Note Xs mean that share prices are rising to
the extent that new buy signals are
made. Os mean that share prices are
falling to the extent that new sell signals are
being made.
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In March 2000, the NASDAQ made its all-time high.
Also in March 2000, enough investors with enough
shares started supplying their shares to the
market (selling). Since there was not sufficient
demand for their shares, just as with any
consumer item, prices must go down. Prices
declined sufficiently that LCG funds fell down on
their charts. Far enough, in fact, that the buy
signals had changed to sell signals. As the
neighboring chart shows, the Bullish Percent went
from 98 in February to 68 by mid-April. This
chart does not tell how much money was lost. It
simply lets people know that by this indicator
high risk was present in March 2000.
Note Xs mean that share prices are rising to
the extent that new buy signals are
made. Os mean that share prices are
falling to the extent that new sell signals are
being made.
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The LCG funds made a recovery in late April 2000,
but the asset class was on Defense by May 2000
(the 5 is hidden by the red filling at the 70
level). Another rally came in June 2000, and
continued into July. But again, in July the
bullish percent hit 86, an extremely high
level. The next reversal came late in July. This
brought the index into a defensive mode through
the remainder of 2000, and the entire year of
2001. A small rally came in January 2002, but
the bullish percent dropped to a level of 6 by
July 2002. The asset class has not shown much
strength since January 2002.
Note Xs mean that share prices are rising to
the extent that new buy signals are
made. Os mean that share prices are
falling to the extent that new sell signals are
being made.
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The MCG category paints a similar picture.
Again, in January 2000, 96 of all mutual funds
in this category showed a buy signal. Also,
this index went to defense in March 2000, as more
of these funds gave up their buy signals for sell
signals. Prices must come down for that to
happen. The index bottomed at the 60 level in
mid-April. Reversing to Os from above the 70
level is a high risk event that warrants
attention from the investor, and, more
importantly, from the investment risk manager, a
k a, your financial advisor.
Note Xs mean that share prices are rising to
the extent that new buy signals are
made. Os mean that share prices are
falling to the extent that new sell signals are
being made.
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The MCG funds made a recovery in late April 2000,
but the asset class was on Defense by May
2000. Another rally came in June 2000, and
continued into July. But again, in July the
bullish percent hit 90, an extremely high
level. The next reversal came in October 2000.
This brought the index into a defensive mode
through the remainder of 2000. A small rally
came in January 2001, but the bullish percent
dropped to a level of 6 by February. Another
rout ensued starting in late February 2001, and
there has not been a significant rally in this
asset class since that time.
DO YOU WANT YOUR FINANCIAL ADVISOR TO MONITOR
THIS TYPE OF RISK?
Note Xs mean that share prices are rising to
the extent that new buy signals are
made. Os mean that share prices are
falling to the extent that new sell signals are
being made.
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Another useful indicator of risk is trend line
analysis. The chart excerpt at the left denotes
the percentage of LCG funds trading above their
long term bullish support lines. Remember, trend
lines have the effect of acting as brick walls,
very tough to penetrate from either side, and
typically bounce objects off of them. In July
1999, and January 2000, the PT index for LCG
mutual funds topped out at a remarkable 98.
April 2000 brought a reversal of this index that
continued into May, and bottomed at the 80
level. The PT index reversal of October 2000
continued to the 10 level by April 2001.
Note Xs mean that share prices are rising to
the extent that more funds of this class are
going above the bearish resistance line discussed
in the previous slide show. Os mean
that share prices are falling to the extent that
more funds of this class are going below the
bullish support line discussed in the previous
slide show..
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In August 2001, the PT index for LCG mutual funds
started falling again. This descent stopped at
the 4. This level was reached again in July
2002.
THE MORAL HERE IS THAT ONCE A TREND IS BROKEN, IT
IS DIFFICULT TO REPAIR.
Note Xs mean that share prices are rising to
the extent that more funds of this class are
going above the bearish resistance line discussed
in the previous slide show. Os mean
that share prices are falling to the extent that
more funds of this class are going below the
bullish support line discussed in the previous
slide show..
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This is the PT chart for MCG mutual funds. It
bears repeating that the reversal to defense
takes place from high levels in April 2000.
While television, radio, print, and internet
media called the stock market situation nothing
worse than a minor correction, somebody knew
more. An often repeated phrase on Wall Street is
the trend is your friend. If you stayed
invested, this trend was not true to your account
balance.
Note Xs mean that share prices are rising to
the extent that more funds of this class are
going above the bearish resistance line discussed
in the previous slide show. Os mean
that share prices are falling to the extent that
more funds of this class are going below the
bullish support line discussed in the previous
slide show..
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The pattern of MCG mutual funds falling below
their trend lines continued to the 20 level in
April 2001. After a series of reversals, the
PT for the MCG asset class fell twice to a low of
8.
THIS TREND HAS NOT BEEN YOUR FRIEND FOR THE LAST
FEW YEARS.
IS YOUR INVESTMENT RISK MANAGER FOLLOWING THE
TREND, OR JUST RIDING THE TREND?
Note Xs mean that share prices are rising to
the extent that more funds of this class are
going above the bearish resistance line discussed
in the previous slide show. Os mean
that share prices are falling to the extent that
more funds of this class are going below the
bullish support line discussed in the previous
slide show..
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The final evaluation tool for this presentation
is to show the relative performance of LCG mutual
funds against the S P 500 Index. Relative
Strength (RS) tells us if the holding is beating
the average, or the average is beating the
holding. The average can be an index, a group of
peers, or simply another holding. Increasing RS
tells us that an asset class is going up faster
than the average, or going down slower than the
average. It is important to note that RS can be
increasing at the same time that actual share
value is decreasing.
Note Xs mean that more funds are outperforming
the index.. Os mean that fewer funds
are outperforming the index..
The S P 500 is an unmanaged index, cannot be
invested into directly. Past performance is no
guarantee of future results.
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Managed funds seek to outperform the S P 500.
The chart at the left shows the percentage of
LCG mutual funds that were outperforming the S
P 500. As you can see, this percentage increased
to a peak of 68 in March 2000. Late in March,
this returned to a column of Os. What this means
is that LCG mutual funds, as an asset class, fell
faster than the S P 500. This particular
column of Os bottomed in late April at the 4
level.
Note Xs mean that more funds are outperforming
the index.. Os mean that fewer funds
are outperforming the index..
The S P 500 is an unmanaged index, cannot be
invested into directly. Past performance is no
guarantee of future results.
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At the left is an excerpt of the RS of the MCG
mutual fund asset class against the S P 500.
It is worth repeating, March 2000 saw the MCG
mutual fund asset class fall out of favor.
Notice how the percentage of MCG funds
outperforming the S P 500 fell to Os. That
column of Os continued to the 6 level at the end
of March, bounced up slightly in April, and then
went back to the 4 level by the end of April
2000. This was another clear confirmation that
money was leaving this asset class, and going
elsewhere.
Note Xs mean that more funds are outperforming
the index.. Os mean that fewer funds
are outperforming the index..
The S P 500 is an unmanaged index, cannot be
invested into directly. Past performance is no
guarantee of future results.
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WHERE DID THE MONEY GO?
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Shown at the left is the bullish percent index
for small company value (SCV) mutual fund asset
class. While nobody can guarantee future
performance, this stands out as the favored asset
class over the last few years, as was evident to
anyone who would pay attention to some
indicators. Just like the other asset classes
shown earlier, this class was making buy signals
through the end of 1999. Unlike the other
classes, this area did not breakdown in March
2000. It did fall in October, but regained
strength as we went into 2001. Simply put, big
money wanted SCV companies and mutual funds at
that time. We could continue the timeline, but it
would be redundant.
Note Xs mean that share prices are rising to
the extent that new buy signals are
made. Os mean that share prices are
falling to the extent that new sell signals are
being made.
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The PT chart for the SCV asset class shows more
and more SCV funds going positive all the way up
to September 2000. This tops out at 78. After
dropping to 66 in December, these types of funds
again started going positive on their trends.
Note Xs mean that share prices are rising to
the extent that more funds of this class are
going above the bearish resistance line discussed
in the previous slide show. Os mean
that share prices are falling to the extent that
more funds of this class are going below the
bullish support line discussed in the previous
slide show..
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The September 11, 2001 tragedy brings tremendous
selling pressure on the SCV asset class. The PT
chart drops to the 46 level. Demand reemerges
in December 2001, and continues through June 2002.
Note Xs mean that share prices are rising to
the extent that more funds of this class are
going above the bearish resistance line discussed
in the previous slide show. Os mean
that share prices are falling to the extent that
more funds of this class are going below the
bullish support line discussed in the previous
slide show..
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The RS of SCV mutual funds was declining in early
2000. In May 2000, there was a tremendous demand
for this asset class relative to the S P 500.
The percentage to SCV mutual funds outperforming
the S P 500 went from 18 in May, to 92 by
March 2001. Demand was clearly in control of
this asset class. Since then, the chart at the
left shows that this class has been strong
relative the S P 500.
Note Xs mean that more funds are outperforming
the index.. Os mean that fewer funds
are outperforming the index..
The S P 500 is an unmanaged index, cannot be
invested into directly. Past performance is no
guarantee of future results.
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QUESTIONS

1. Who is monitoring the risk in your portfolio?
2. Did you see the clear changes in risk in certain
   asset classes?
3. Did your current financial advisor adjust to
   these major trends before your portfolio was
   hurt?
4. Do you want to work with an advisor who monitors
   these trends each day, and seeks to keep your
   portfolio intact during the difficult times?
5. Would you like us to review your portfolio? If
   so, call Phil Rongo, Doug Rongo, or Christa
   Cicchetti at 973-538-7030 to arrange a convenient
   time.

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CONCLUSIONS

1. Lack of investment risk management can be
   hazardous to your wealth.
2. Somebody, either you, or your compensated
   financial advisor, has to monitor the risk.
3. There is risk of losses by holding certain asset
   classes when they go out of favor.
4. By the time the major media catch on to the asset
   class rotation, it may be too late to be highly
   successful.
5. If your current financial advisor is unaware of
   these changes, call Phil Rongo, Doug Rongo, or
   Christa Cicchetti at 973-538-7030.