Those of you who have read this column or our blog (www.moneymanagerslive.com) will remember that from March forward we have been encouraging readers to become fully invested in the stock market. We likened the stock market to the sale of the century. At a time when most investors were selling all of their investments, we told readers to move back to a fully invested position. We recommended readers take advantage of this rare, but scary, situation by investing in those areas of the market that have historically performed “best” after a market meltdown. We didn’t just give the typical — but useless — “cautiously optimistic” outlook. We named specific areas of the market you should be invested in.

Since the March 9 low through July 31, the S&P 500 has gained 46 percent. It has made back its losses from January through mid-March and is now up 10.9 percent year-to-date through July 31.

During that same time, our growth portfolio, Top Flight, is up 17.2 percent year-to-date. The reason we are up substantially more than the market is because we invested in those areas that perform best after a severe market decline — just like we recommended.

If you followed our advice, you were rewarded. But going forward, the question is how should an investor be invested? In July, our indicators and the models we follow indicate there is a high probability the recession ended in June — although this hasn’t shown up in the press and is not yet mainstream knowledge.

The first and sharpest stage of market recovery usually occurs right after the initial market plunge and takes about three to four months. We believe stage one occurred between March 9 and June 30. The second stage of recovery occurs after the recession ends, which we believe was around the end of June.

If it is true the recession ended in June, then we now want to be invested in those areas of the market that do best during the second stage, or after a recession ends. The second stage lasts for about six months. Following the last 11 recessions, the data clearly shows that certain areas of the market consistently perform best during stage two.

Typically, bonds perform poorly after recessions and should be avoided. Interest rates get pushed down during the recession, and then, as the economy starts to expand, demand for money increases and interest rates go back up. When interest rates go up, most bonds get hammered and lose money. Bonds are one of the worst places to be as an economy emerges from a recession. Unfortunately, many misguided investors have been running to bonds for the past six months, hoping to find safety. If history repeats, they will find the opposite of what they seek.

From a big picture perspective, small cap, growth, commodities and emerging market stocks have performed the best for the six months following the end of the recession. On a sector basis, energy, materials, tech and consumer discretionary stocks performed the best.

On the other hand, in addition to bonds, other sectors that usually perform poorly after a recession ends — and should be avoided — include consumer staples, health care and telecommunication stocks.

This difficult market highlights why “active” investment management is so important. If market dynamics always stayed the same, then a simple buy-and-hold approach would most likely work well for investors. Because market dynamics are constantly changing and evolving, we believe the best investment approach is one that actively adjusts, moves and changes based on market conditions.

The views in this column are my opinions. They are not intended as a forecast or a guarantee of future results.

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