"Several factors point to a sustained rally through the election, and possibly longer." says Jim Stack, a leading money manager and newsletter advisor known for his "safety-first" strategy.

Here, in his the top performing InvesTech Market Analyst, he explains why he has turned cautiously more optimistic and offers a look at some new positions, including a fund run by the noted advisor Chuck Royce.

"Notably, our technical models have improved, with breadth stabilizing. In spite of lingering credit problems, the monetary climate is moderately favorable with the Fed pulling out every imaginable stop (including nine discount rate cuts) to stimulate the economy and using depression era tactics to rescue a non-regulated investment bank.

"And in an election year, the combination of politics and promises usually generates a nice tailwind as politicians hit the campaign trail in earnest. Only once in 20 Presidential Election years since 1928 has the market lost more than 2% from May 1 to Election Day.

"However, two wild cards continue to carry substantial risk! First, there’s the housing washout, where inventories have bounced back to record highs and home prices continue to fall with no end in sight.

"The second issue is soaring energy prices, which –if they continue to rise, or even hold at current levels– could crush the economy.

"Consequently, the economy remains mired in recession with consumer confidence and consumer sentiment gauges at 16-year and 27-year lows, respectively. This leaves us with a strategy dilemma.

"Investing in bull markets is dramatically different than planning bear market protection. The biggest losing sectors in a bear market are typically Financials, Industrials, Consumer Discretionary and Technology, and these were among the biggest losers from the October peak to the March bottom.

"In a new bull market, however, these sectors move to the top of the list. Conversely, the defensive sectors –Energy, Utilities, Consumer Staples and Health Care– which are more resilient in a bear market, often lag in a new bull market.

"So here’s the key question: Is this a bear market rally that could last through election or is it a new bull market? If this is a new bull market, it’s not typical!

"Energy stocks should be lagging after a recessionary bear market but they’re close to record highs, driven in part by speculation. Conversely, Financials and Consumer Discretionary stocks, which should be leading, remain depressed.

"Given the situation, our goal is to take advantage of the bullish trend in the market, but not ignore continuing risks or the possibility of a change in the weather at any time. Consequently, we’ve increased our allocation slightly within our current comfort level of 45-60% invested.

"We are adding a position in Microsoft (NASDAQ: MSFT). Technology is a leading sector in new bull market rallies, and Microsoft’s excellent financial strength and compelling valuation make it a conservative portfolio addition.

"We are also adding a position in iShares Russell Midcap Growth Index (ASE: IWP). This exchange traded fund (ETF) was chosen over more volatile small-cap counterparts as we feel mid-cap stocks will provide more consistent and reliable gains at this stage.

"In our Alternate Mutual Fund Portfolio, we have added a position in Royce Pennsylvania Mutual Fund
(PENNX). Chuck Royce has managed this low turnover, $3 billion flagship fund since 1973. It is a small-cap fund, but the conservative, valueoriented approach readily passes our selective screening process.

"Moreover, this fund has one of the lowest expense ratios (0.88%) in its class, and its performance has consistently ranked in the top 20% of its category over the past 10 years. Note that there is a 1% redemption fee if the fund is held less than 6 months."