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Friday, July 21, 2006

Confusion on Wall Street

The 21-Day Breadth, 21-Day Volume, On-Balance Volume %, MACD and 15-Day Relative Strength indicators that I look at daily continue to illustrate the range bound market that we’re currently faced with. The only indicator that remained bullish was the 15-Day Stochastic. This indicator takes the close of the Dow Jones Industrial Average and subtracts from it the lowest DJIA close over the last fifteen days. That value is then divided by the highest DJIA close minus the lowest DJIA close over the same fifteen days. A three day moving average smoothes the value. Normally, when this value moves from below twenty to above twenty it is considered a buy signal. Conversely, when it moves from above eighty to below eighty that indicates a sell signal. Despite yesterdays broad-based reversal, the 15-Day Stochastic increased from 20.20 to 30.88 overnight. This indicator is only one of several I use daily and by no means dictates my overall market call. But I always pay attention to the black sheep, if for no other reason than to observe its movement.

These indicators, much like the market itself, fluctuate almost daily from slightly bearish to slightly bullish. This brings to focus a very obvious rule that trend followers observe, but one that many investors fail to accept. Market reversals or trends, much like Rome, are not built in a day. I’m not implying that comments from the Fed, or strong earnings reports, or war in the Middle East cannot impact the market. I’m simple saying that it takes more to resuscitate a range-bound market than some investors realize.

So, where does that leave us now? Long or short? Tech or Energy? Foreign or Government Bond? I think the best course of action is first to relax, and second not to over react. Don’t swing at every curve ball the market throws your way. At this point, a lot more money can be lost than can be made. We’re still advising extreme caution and an asset allocation of between 0% and 25% equities. The total universe of stocks, ETF and funds which Alpha Advisor Service, LLC reviews on a daily basis is 1,745. Of those reviewed, 216 are rated "Buy," 972 are rated "Sell" and 557 "Neutral." With over four times as many “Sells” as “Buys,” we’re not overly excited about the odds facing us at the moment.

Real Estate, Utilities and Healthcare are still “AAS Recommended Buys.” Financials and Financial Services are doing well this week. I’d like to see financials take the lead and help guide the market, but that has yet to happen, although this week might have been the beginning. Which sectors are worth avoiding currently? Semiconductors and Networking are the lowest rated, but Biotechnology and Transports are not far behind.

Despite the reversal, there are some equities that managed to be up-graded to “AAS Recommended Buys” this morning. There are forty-seven utility stocks currently rated as “AAS Recommended Buys,” by far more than any other sector. The five new ones are: Duquesne Light Holdings Inc. (DQE), Edison International (EIX), Pinnacle West Capital Corp. (PNW), Laclede Group Inc. (LG) and Vectren Corp. (VCE).

Telecommunication is a sector I briefly discussed yesterday as one that tech-craving investors might look at. Interestingly enough, Qwest Communications International Inc. (Q) was also upgraded to an “AAS Recommended Buy” this morning.

Healthcare, a relatively newly upgraded sector, presents almost as many worthy equities as the Utilities sector. Two stocks that I noticed are Community Health Systems Inc. (CYH) and HCA Inc. (HCA). These are hospital related healthcare stocks, which is a conservative play in a time of uncertainty and volatility.

Enjoy your weekend!

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