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Barrel into This Large-Cap Fund

11/11/2011 9:30 am EST

Focus: FUNDS

Janet Brown

President, FundX Investment Group

Just when markets looked really dismal, the storm clouds lifted and stocks surged in October, and this fund should continue to gain on the back of that general uptrend, notes Janet Brown of NoLoad FundX.

Remember, last month the Dow enjoyed the largest monthly point gain ever. Both the Dow and the S&P are now positive for the year, while small-cap and international indices remain negative.

News has been so discouraging that many investors have been caught in a grip of fear. It would be difficult to imagine more grave scenarios than many investors foresaw.

There is a lot of cash on the sidelines and pent-up demand. As we saw in last month’s rally, even a glimpse of hope unleashed the most powerful stock rally in decades.

The strong rebound could simply be a correction of the steep sell-off, yet encouraging news seems to be easing fears. Expanding corporate earnings and positive economic reports pushed stock markets higher. Investor confidence improved considerably as domestic indexes climbed above key resistance levels.

Stocks are attractive because corporate profits have risen, and also because the alternatives look so bad. Bonds have rallied, driving yields to extremely low levels in the three-decade-old bull market.

The S&P 500’s earnings yield is about 8%. That may fall to 7% if 2012 earnings come in lower than expected, but it would still be far superior to the 2.3% yield on ten-year Treasuries or the 4% offered on investment-grade corporate bonds. The dividend yield alone on the S&P 500 is now 2.03%, not far from the ten-year Treasury yield.

Most bulls and bears agree that deleveraging still has years to go, and will constrain economic growth. Still, the first reading of third-quarter gross domestic product came in at 2.5%, better than the previous quarter (but not enough to produce significant jobs).

As always with monthly upgrading, you are led toward the funds that are bringing in the best relative returns.

Seven of the top ten funds in Core Stock Funds are large-cap value. Although these funds didn’t lead for the one-month, their three-, six- and 12-month returns were strong. Large-cap also leads in Aggressive Stock Funds, where large-cap growth funds including the Nasdaq indexes continue to lead.

Amid the erratic market swings, there’s been some remarkable consistency: Aggressive Stock Fund Wells Fargo Advantage Growth (SGROX), for example, has been top-ranked for a year now.

Among aggressive sector funds, previously floundering energy funds reversed course and posted some of the largest one-month gains. Utilities, pharmaceuticals, and consumer goods remain top-ranked, and gold is once again in the No. 1 slot.

Even after the strong run-up in the market last month, our ranks are prompting us to sell a more volatile fund to buy a less volatile one. We’ve opted to go with a NTF (no transaction fee), actively managed fund that is ranked #6 in its class: Weitz Value (WVALX).

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