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If interest rates keep going higher from here, we would run the risk of derailing a still-fragile recovery. As long as the Fed tapering uncertainty exists, we expect higher volatility on the 10-year yield to persist in the mean time.

Our AdvantHedge Composite lost 5.9% in July, lagging the inverse performance of the S&P 500 (5.1%), but outpacing both the NASDAQ (6.6%) and the Russell 2000 (7.0%) as the market returned to “risk-on” mode.

Excellent scores in three of six model categories, plus it offers plenty of market cap and low beta relative to other Health Care groups. We think it will benefit from broad, long-term industry trends.

Attractive valuations, improving growth and technical strength are the key drivers. The group offers an opportunity to participate primarily in the overall growth of computing devices.

But Information Technology rises to the top of the Domestic model, while the trend of Financials domination in the Global model remains intact.

 Health Care Distributors and Electronic Manufacturing Services were both added to the portfolio this month.

Group Deactivations: Oil & Gas Refining & Marketing was deactivated.

Core, Global, and Asset Allocation Portfolio overviews.

The S&P 500 gained 4.9% (price only) in July. Based on the valuation metrics presented in the table below, the S&P 500 is 12% above its historical average. S&P Industrials (excludes Utilities and Financials) now have 21% downside to reach mean valuation.

There are some substantial deviations in sector performance depending on your constituents and weighting scheme while, simultaneously, betas are converging toward one another.

Core, Global, and Asset Allocation Portfolio overviews.

Specialty Stores, Home Furnishing Retail, Personal Products, and Cable & Satellite.

Information Technology sector weight declined across all market tiers, including a 0.4% drop within the S&P 500. However, it remains the largest sector weighting among Large Caps. Financials remain the heaviest weight for both Mid and Small Caps.

The Equal Weighted S&P 500 (-1.3%) slightly outperformed the Cap Weighted S&P 500 (-1.5%) and continues to outperform YTD.

Large Caps lost 1.3% in June, lagging Small Caps (-0.5%). Both fared better than Mid Caps (-1.9%). YTD, Small Caps are now ahead of the other two subsets.

Small Caps are selling at a 15% valuation premium relative to Large Caps, using non-normalized trailing operating earnings. This is slightly higher than last month’s reading of 14%. Using estimated 2013 operating earnings, Small Caps are selling at a higher valuation premium of 25% (22% last month).

Q1 relative to Q4 growth rates deteriorated across all capitalization tiers indicating a broad based top-line slowdown. Mega Caps delivered zero median top-line revenue growth in Q1.

Results look even weaker than those indicated by the first two months of the quarter’s readings. The Q1 ratio of 1.15 is well below the historical average of 1.53, and the lowest reading since Q3 2009.

Info Tech remains the largest sector short position, while Energy is second.

Airlines are Attractive in both group models, but there could be trouble on the horizon as emerging market carriers face the challenges of rapid growth.