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Thursday, July 20, 2006

Investors Be Wary

Fed Chairman Bernanke sparked a huge rally across the boards yesterday by testifying to Congress that inflation is now under control and that a recession was unlikely. Wall Street scaled-back the probability of another quarter point rate hike in August from 90% to 68%, as indicated by Fed Fund futures contracts. A strong earnings report by JP Morgan (JPM) further motivated the Dow Jones Industrials index to the largest percentage gain since April 2002. Solid after-the-close reports by Apple Computer (AAPL), Motorola (MOT) and eBay (EBAY) should balance with the not-so-good quarterly results of Intel (INTC), Qualcomm (QCOM) and especially Yahoo! (YHOO) which is down nearly 22%. The S&P 500 Index jumped 1.9% on the day, with Southwest Airlines (LUV) the biggest gainer at 9.3%. Before the bell futures traded near fair value indicating a relatively flat open.

Despite the broad-based rebound yesterday, not all news was good news. The core Consumer Price Index (CPI) rose 0.3% in June, steeper than the 0.2% consensus estimates. Additionally, the year-over-year core CPI was up 2.6%, the first time that rate has been above 2.4% since the spring of 2002. Finally, groundbreaking on new homes in June fell 5.3% from the month before to an annual rate of 1.85 million units, lower than the expected rate of 1.9 million.

The biggest question for investors alike is what does yesterday mean? Should this be interpreted as the beginning of a rally, or was yesterday the result of short-covering by investors expecting a downturn? The big board only saw volume at 1.8 billion shares, hardly enough to indicate a trend reversal. Yet several of the technical indicators we follow made huge reversals including the 21-Day Breadth, 21-Day Volume, On-Balance Volume %, MACD, 15-Day Stochastic and 15-Day Relative Strength indicators. Additionally, all three Put / Call Ratios retreated.

I think ordinarily in a down-trending market, a day like yesterday might be enough to spark a reversal. But unfortunately we’re not in a trending market, we’re range bound, a condition dictated by traders and much too volatile for us. In fact, yesterday’s activity does little to change our opinion of the markets. 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, 234 are rated "Buy," 765 are rated "Sell" and 746 "Neutral."

Despite yesterday, Real Estate, Utilities and now Healthcare are the only sectors rated as “AAS Recommended Buys.” Financials, Financial Services and yes, Telecommunication, are all having a good week, as evident by their increasing AAS Rating Scores, yet they are still unable to pass the indicators needed to be upgraded to “AAS Recommended Buys.” Equities within the technology sectors are always volatile, but with the strong earnings statements yesterday coupled with those of Google (GOOG), Microsoft (MSFT) and Advanced Micro Devices (AMD) on the docket, value investors want to watch the Telecomm and even Software sectors closely. It might not be a bad idea to invest in one or two newly upgraded tech stocks, at least for the short term. Possible candidates include Cincinnati Bell Inc. (CBB) and Komag Inc. (KOMG).

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