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As the second quarter opened, the stock market was on its way to what has thus far turned into its year-to-date high in late April and early May. It was then that investor sentiment took a turn for the worse. Uneasiness over a range of factors-including the ongoing sovereign-debt problems in Europe, the prospects for the United States economy and its capability to create needed job growth, and the debt-ceiling negotiations in Washington-all led to a second-quarter market low in mid-June. Somehow, though, investors shook these concerns off, and the stock market rebounded to close the period on a strong note.

The Value Line (Geometric) Average, which rose 5.5% in the first quarter, fell 2.3% in the June period to finish 3.1% in the black for the first half. The Group 1s, which had been up 8.8% at the end of the first quarter, gave back some gains to finish with a leading 4.2% advance for the half. Indeed, all the value-oriented strategies reviewed here underperformed the Group 1s and the Value Line (Geometric) Average for the second quarter and first half.

SMS 2Q 2011 Box 2

Specifically, the low price-to-sales strategy, which had trailed the Group 1s at the end of the first quarter, stayed in second place, though it swung to a loss of 1.3% for the half. Neither did the low price-to-book value strategy fare well, posting a loss of  2.5% at the half, after showing a gain of 2.8% at the end of the March period. Finally, the low market-capitalization and low price-to-earnings strategies finished at the bottom for the first half, deeply in the red.

The chart below tracks the long-term relative performance of the five strategies regularly reviewed. The curves measure the relative performance of each of the strategies on the assumption that one is always invested in the best 10% of the various strategies, and that the portfolio is rebalanced each month.

SMS 2Q 2011 Chart

Our current asset allocation recommendation is to be 65%-75% invested in common stocks. Although concerns relating to the strength of financial institutions in Europe and the large domestic budgetary imbalance may continue to weigh on the stock market, especially with a possible U.S. debt downgrade now a threat, investors with multiple-year horizons would do well to consider stocks in Value Line's Timeliness Group 1. Their enviable track record over four and half decades speaks for itself.