Portable Alpha Daily

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Wednesday, July 19, 2006

CPI and Bernanke Headline Today's Markets

Wednesday will undoubtedly be another volatile day due to corporate earnings statements, economic releases including the Core Consumer Price Index (CPI), Crude Inventories and Housing Starts as well as Fed Chairman Bernanke’s session with Congress. Total CPI rose 0.2% in June, matching consensus estimates, however the core rate rose a higher-than-expected 0.3%. Today’s report illustrates that inflation, although still prevalent, is slowing. With this being the fourth straight month of CPI increases, the Fed will likely continue to raise rates, at least once more, to fight inflation. June Housing Starts fell 5.3% while Building Permits fell by 1.86 million units.

Pre-market futures were mixed, likely due to today’s market news, as well as further escalation in the Middle East overnight. Yahoo! (YHOO) lost more than 14% in after-hours trading due to a delay in highly-anticipated revenue generating technology. It will be interesting to see the impact this has on the technology sector as a whole over the next few weeks. JP Morgan Chase (JPM), the nation’s third largest bank, reported stronger than expected Q2 profits with revenue up 15%, which might offset the disappointing Citibank (C) report released earlier in the week. General Dynamics (GD) reported an 84% increase in Q2 profits as a result of renewed demand for military equipment and business jets.

There was little movement overnight for the sentiment indicators that we follow. VIX and VXN reversed slightly, hinting at a less-volatile market yesterday as opposed to the past few days. The Total and Equity Only Put / Call Ratios, however, continued to gain closer to their 52-week highs. Higher ratios indicate an increase in put volume, which can be interpreted as a contrarian bullish indicator. The Investors Intelligence Advisor Sentiment Survey changed little from a week ago with the difference between Bullish and Bearish advisors at 8.9%. The difference between Bears and Bulls has increased from a bottom of 0% four weeks ago reflecting a bullish bias.

The technical and fundamental indicators we follow continue to reflect a bearish market despite the NYSE Advance-Decline Line, 21-Day Breadth Indicator, 21-Day Volume Ratio and On-Balance Volume % indicators improving from the prior day. Our asset allocation recommendation remains constant at 0% to 25%. The total universe of stocks, ETF and funds which Alpha Advisor Service, LLC reviews on a daily basis is 1,746. Of those reviewed, 172 are rated "Buy," 1016 are rated "Sell" and 558 "Neutral."

Real Estate and Utilities continue to be the only sectors rated as “AAS Recommended Buys.” Market volatility will likely continue at its current rate over the next few weeks, and as such we’re perfectly comfortable waiting for more buying indicators before entering back into the market. If investors are looking for one, two, maybe three positions to incorporate into their portfolios for the short term, they should look to the Portfolio Builder page for those sectors or markets that are currently outperforming.

Mutual fund investors might look to Rydex Dynamic funds or ProFunds Inverse and Bond funds. The Rydex Inverse Dynamic OTC (RYVNX) is the highest AAS Rated fund within the Dynamic group while ProFunds Ultra Short Small Cap (UCPIX) and ProFunds Rising U.S. Dollar (RDPIX) represent this highest AAS Rated funds within their respective ProFund groups. Investors looking for an ETF might examine the Top Ten page and select a Real Estate (ICF), Utility (UTH) or Bond (TLT) ETF. Fidelity investors should watch the Fidelity Inflation Protected Bond (FINPX) fund as well as the Fidelity Utilities Fund (FIUIX) and Fidelity Real Estate Investment (FRESX) as possible investment ideas.

Prior to finishing this post, the market experienced very strong upside movement, based in part on signs the economy is cooling, which hints at an end to Fed rate hikes, as well as strong earnings from International Business Machines (IBM).


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