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Wednesday, July 26, 2006

Is the Market Gaining Traction?

Things are beginning to get interesting on Wall Street. We’re seeing solid earnings reports, for the most part, and an earnest push by the market to at least get some traction and move forward. For the past few weeks the markets have been spinning their wheels, being driven by headlines and rhetoric and not fundamental or technical underpinnings. Still, I see no reason to shift from my bearish stance and join the bulls in a buying frenzy. Times like these, although hopefully improving, are perhaps the most dangerous in terms of letting the masses influence your investment strategy. The markets are just as likely to recede for two or three straight days as they are to improve. I suggest patience and caution over the next few days and weeks, up until the early August FOMC meeting.

I am still recommending 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 1,742. Of those reviewed, 261 are rated "Buy," 803 are rated "Sell" and 678 "Neutral." If the markets continue to gain momentum into early August, and the Fed calls for a pause in rate hikes, then we will probably shift and increase our asset allocation recommendations for the rest of the year. Until then, we’re content with the majority of our portfolios in safe investments while looking to add alpha with a few short-term holdings.

There are several arenas where investors can look to augment returns, if only for a short while. We continue to like Real Estate, Utilities, Healthcare and Telecommunication. These sectors have really performed well since they were upgraded, and most of the equities that we’ve selected within these sectors have also performed well. Other potential sectors include Energy and Natural Resources as well as Financials, which have all strengthened over the last few days, but still fall short of being “AAS Recommended Buys.” Conversely, we are avoiding Transports and Networking, which have been the lowest rated sectors for several weeks now.

Below is a list of stocks, mutual funds or exchange traded funds that were up-graded today to “AAS Recommended Buys” and that fall within one of the top four rated sectors listed above. Investors seeking to generate excess return for their portfolios might consider one or two of the following position on a short-term basis. For information on how we analyze equities and on the proprietary alpha analytic we use, please click here.

Liberty Property Trust (LRY Real Estate); PNM Resources Inc. (PNM Utilities); Cephalon Inc. (CEPH Healthcare); Hologic Inc. (HOLX Healthcare); PolyMedica Corp. (PLMD Healthcare); Biotech HOLDRs (BBH Healthcare); DSP Group Inc. (DSPG Telecommunication).

Other interesting equities upgraded this morning include:

Oracle Corp. (ORCL Internet); Merrill Lynch & Co. (MER Financials); General Mills Inc. (GIS Food); McGraw Hill Companies Inc. (MHP, Media); ProFunds Ultra Sector Biotechnology (BIPIX Biotechnology) and Aeropostale Inc. (ARO Retail).

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