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Thursday, July 27, 2006

Alpha is Out There

The markets fell slightly short of a third straight day of gains yesterday, yet half of the short-term technical indicators I follow remained bullish. The NYSE Advance / Decline line continued to improve, as did the Dow Jones Industrial Average’s MACD and 15-Day Stochastic. Indicators weakening overnight include the DJIA 21-Day Breadth Indicator, 15-Day Relative Strength Index and 21-Day Volume Ratio as well as the S&P 500 On-Balance Volume %. This dichotomy further confirms our cautiously optimistic view of the market, which in essence sees the potential for a rally to develop over the next few weeks, but suggests patience as the indicators and market in general continue to solidify.

Volatility, as expressed by the VIX and VXN, continues to recede from both last weeks and Tuesday’s levels. The VXN remains much closer to its 52-Week high than the VIX, which should be expected based on the recent weakness in the Network, Technology and Semiconductor sectors. These sectors have been among our lowest rated sectors since at least the beginning of July. Joining those sectors at the bottom of our rating analysis is Transports, which became an “AAS Recommended Sell” sector on July 20th.

I continue to recommend an asset allocation of between 0% and 25% equities, however if we continue to see a moderately bullish trend develop, the asset allocation recommendation might be increased to between 25% and 50% equities sometime next week. The total universe of stocks, ETF and funds which I review on a daily basis is 1,742. Of those reviewed, 275 are rated "Buy," 824 are rated "Sell" and 643 "Neutral."

Those sectors which I perceive as potential leaders into a rally continue to include Real Estate, Utilities, Healthcare and Telecommunication. Sectors which have strengthened over the last few days but that fail to pass our two independent technical indicators include Energy, Natural Resources, Financials, Non-Cyclical, Biotechnology and Software. Investors should pay special attention to these “Neutral” rated sectors over the next few days to observe any further strengthening before investment.

Below is a list of stocks, mutual funds or exchange traded funds that were up-graded today to “AAS Recommended Buys” and that fall within one of the top four rated sectors listed above. Investors seeking to generate excess return for their portfolios might consider one or two of the following positions on a short-term basis. For information on how we analyze equities and on the proprietary alpha analytic we use, please click here.

Macerich Co. (MAC Real Estate); Peoples Energy Corp. (PGL Utilities); Mylan Laboratories Inc. (MYL Healthcare); Medtronic Inc. (MDT Healthcare); Rehabcare Group Inc. (RHB Healthcare); Owens & Minor Inc. (OMI Healthcare); Fidelity Select Medical Equipment/Systems Fund (FSEMX Healthcare); iShares S&P Global Healthcare Sector (IXJ Healthcare); Parametric Technology Corp. (PMTC Internet) and Vanguard Telecomm Services VIPERs (VOX Telecomm).

Other equities upgraded this morning include:

WR Berkley Corp. (BER Insurance); Valero Energy Corp. (VLO Oil & Gas); ConocoPhillips (COP Oil & Gas); Pioneer Natural Resources Co. (PXD Oil & Gas) and Silicon Laboratories Inc. (SLAB Semiconductors).

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