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Monday, July 31, 2006

Buying Opportunities Developing

Last week was certainly an interesting one for the markets, both here in the U.S and globally. I’d like to believe that the markets are beginning to emerge from the trading range they’ve been stuck in for the last few months, but I just can’t convince myself that the tides have changed, at least not completely. Although I will concede that buying opportunities are emerging, especially considering the number of upgrades in my analysis this morning.

There are now ten major markets that I analyze (I added two over the weekend), yet none pass both the proprietary alpha analytic and the confirming technical indicators tests needed to be recommended “buys.” However, eight of the ten are “neutral” rated, with only the S&P Small Cap (IJR) and S&P Mid Cap (IJH) markets currently rated “sell.” The top two major markets are the NYSE (NYC) and the S&P 500 (IVV). Investors looking for broad-based market exposure in their portfolios might look to those two Exchange Traded Funds first.

Of the ten “style-box” investments that I analyze, I still see no outright recommended “buys” although there are seven “neutral” rated derivatives. The Russell 3000 Growth (IWW) and S&P Large Cap Value (IVE) are at the top of the “neutral” rated style-box investments. A lot of investors, when developing and managing their long-term portfolios, like to allocate based on style-box, which is one of the reasons we include this analysis in our Market Overview section of the newsletter. What today’s analysis should tell them is that there are no style-boxes that are clearly out-performing the others, so there is no need to adjust asset allocation yet. However, they should pay special attention over the next few days and see if any style-box derivative emerges as a market leader.

The Sector analysis is where things are getting interesting. We still have only four “buy” rated sectors including Real Estate (IYR), Utilities (IDU), Healthcare (IYH) and Telecommunication (IYZ). Real Estate and Utilities have been “buys” for a few weeks now and have done very well in the face of a highly volatile market, while Healthcare and more recently Telecommunication have done well in the near-term. And although I’m not seeing any obvious weakening in these sectors, I think there are others that warrant some attention.

Obviously Energy (IYE) and Natural Resources (IGE) are in play with the turmoil in the Middle East, rising gas prices and the U.S. heat wave. Most, if not all investors should have at least one holding in energy at this point, so this is not really new knowledge.

What I’m interested in are Financials (IYF), Financial Services (IYG) and Non-Cyclicals (IYK), as these very well might be the leading sectors within the next few weeks. Bear Stearns Companies Inc. (BSC) and Merrill Lynch & Co. Inc. (MER) were upgraded to “buys” this morning.

Additionally, I think Semiconductors (IGW) are worth examining. It is the lowest rated “neutral” sector currently, but was the best performing last week. With the NASDAQ taking a beating recently, a speculative holding in a recently upgraded semiconductor company, such as Novellus Systems Inc. (NVLS); Micrel Inc. (MCRL) or Microsemi Corp. (MSCC) might be worth looking into.

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