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Tuesday, July 18, 2006

Interesting Week Ahead

Last week’s broad market decline was the most significant since April 2005. The Dow Jones Industrial Average lost 3.17%, while the NASDAQ and S&P 500 each lost 4.35% and 2.28% respectively. Rising oil prices, fueled by the escalating Middle East conflict as well as Iran’s potential involvement contributed to the sell-off. It appears that today’s market is continuing last week’s trend, at least in terms of confusion. Bearish pre-market futures indicated a lower open, while a reduction in the price of oil hinted at a possible higher open. Second quarter results from Citigroup (C), the worlds largest bank, were slightly below expectations.

In terms of the technical indicators that we follow when gauging our market opinion, nearly all continued their move into negative territory. With such a large sell-off last week, the NYSE Advance - Decline line continued to weaken as did the S&P 500 On-Balance Volume Percentage. Indicators for the Dow Jones Industrial Average didn’t fare much better as the MACD, 15-Day Stochastic and 15-Day Relative Strength Index closed below the prior week’s levels.

The total universe of Stocks, ETF’s and Mutual Funds which Alpha Advisor Service, LLC currently reviews on a daily basis is 1,751. Of those reviewed 155 are rated “Buy”, 949 are rated “Sell” and 647 “Neutral." If we continue to see a decline in the number of “AAS Recommended Buys”, say to levels below 100, that could be viewed as short-term bullish since the market is likely oversold. However, we’re sticking by our late April allocation recommendation of between 0% and 25% equities. The markets are too volatile at the moment and we feel that investors are better served waiting, perhaps even for the remainder of the summer, before re-allocating their portfolios for the last few months of the year.

Where can investors look to invest the 25% or so of their portfolios? Well, there aren’t a whole lot of attractive options at the moment. We see only two major markets, the American Stock Exchange and the NYSE, as potential markets to start with. These markets are only rated “Neutral” now, which means if you own funds or ETF’s which mimic those markets, consider that a “Hold” call and not a “Buy or a Sell.” The same holds true for the Russell 3000 Growth, S&P 500 Value and S&P 1500, which are all rated “AAS Neutral.” The remainder of the seven major markets and seven style box investments that we analyze daily are all “AAS Recommended Sells.”

As for possible sector investments, there are still two sectors worth considering, Real Estate and Utilities. These were both “AAS Recommended Buy’s” last week and remain so today. Only three sectors had positive performance last week: Utilities, Natural Resources and Energy. Currently, Natural Resources and Energy have positive AAS Rating Scores, but they have not passed the technical indicators needed in order to be upgraded to “AAS Recommended Buys.” Investors considering adding one or two positions to their portfolio might want to wait for those sectors to be upgraded, then look for a stock or fund from the AAS Top Ten that coincides with those sectors.

Real Estate stocks recently upgraded to “AAS Recommended Buys” include National Retail Properties, Inc. (NNN) and Vornado Realty Trust (VNO) which are both REIT’s. In terms of utilities, two electric power and two gas distribution stocks are on our radar. The electric power companies are Excelon Corp (EXC) and Wisconsin Public Service (WPS) while the gas distribution companies are Washington Gas & Light Co. (WGL) and Northwest Natural Gas Co (NWN). All six stocks were upgraded last week. In order to ensure proper portfolio diversification, AAS recommends only one Real Estate stock and/or one Utility stock. Remember, the purpose of these stocks is to generate modest gains above what the market is doing; that’s the whole point of alpha.

Of course, investors do have the option of shorting the market, especially if they feel that last weeks trend will continue into this week and the next. The ProFund Inverse Funds index, located on the AAS Portfolio Builder page, was up by 6.10% last week. Those ProFund Inverse Funds at the top of our list include ProFund Ultra Short OTC and ProFund Ultra Short Small Cap.

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