Portable Alpha Daily

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Tuesday, July 18, 2006

A Response to Monday's Market

Monday again saw continued volatility and confusion within the markets and that appears to be carrying over into today’s trading session. Pre-market futures are down, perhaps due to concerns over earnings estimates as well as the duration of the current Middle East conflict and a rebound in oil prices from yesterday’s levels. Better than expected earnings from Coca Cola (KO), United Technologies Corp. (UTX), Johnson and Johnson (JNJ) and Merrill Lynch (MER) might be sufficient to initiate a decent rally today, despite Target (TGT) cutting its July sales guidance.

Today’s release of the Producer Price Index (PPI) indicated that wholesale prices rose by a larger-than-expected 0.5 percent in June but core inflation, excluding food and energy, edged up just 0.2 percent.

The indicators that we follow continue to weaken. In terms of Investor Sentiment, we’ve seen an increase in the Equity Put / Call Ratio as well as the Total Put / Call Ratio over the last week. The VIX and VXN also continue to approach their 52-week highs of 23.81 and 25.73 respectively, further confirming the high volatility prevalent on Wall Street.

Each of the eight Technical Indicators is below the prior week’s value. Two of our favorite short-term technical indicators are the 15-Day Stochastic and the 15-Day Relative Strength Index. The movement of these indicators, although short-term in nature, often indicate a short-term trend reversal, but only when the 15-Day Stochastic goes from below 20 to above 20 and when the 15-Day Relative Strength Index rises from below 30 to above 30. Currently, the 15-Day Stochastic is 2.51, down from yesterday’s value of 18.29. The 15-Day Relative Strength Index, however, is 29.30, up from yesterday’s value of 28.42. Although we don’t recommend buying based on these indicators alone, it’s helpful to keep track of their movement as clues to a possible change in trend.

The total universe of Stocks, ETF's and Mutual Funds which Alpha Advisor Service, LLC currently reviews on a daily basis is 1,747. Of those reviewed 153 are rated "Buy," 1034 are rated "Sell" and 564 "Neutral." We continue to stick by our late April allocation recommendation of between 0% and 25% equities.

There remain only two major markets, the American Stock Exchange and the NYSE that we have not rated as “AAS Recommended Sells.” 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 and the S&P 500 Value, which are rated “AAS Neutral.” The remainder of the seven major markets and eight style box investments that we analyze daily are all “AAS Recommended Sells.

Real Estate and Utilities are the only two sectors which meet our criteria to be “AAS Recommended Buy’s.” Currently Natural Resources, Energy, Transports, Financials, Financial Services, Non-Cyclicals, Healthcare and Telecommunication sectors 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.

There are four newly up-graded stocks that fall within the Real Estate and Utilities sectors. Colonial Property Trust (CLP), an equity REIT, joins National Retail Properties (NNN) and Vornado Realty Trust (VNO).

The Utilities sector provided a few more opportunities today with the addition of Ameren Corp. (AEE) and Progress Energy (PGN) which are both electric power utility companies while Energen Corp. (EGN) represents gas distribution.

In terms of Exchange Traded Funds, we're sticking by our sector analysis and recommending Utility and Real Estate ETF's. Those at the top of our list include IDU and UTH for Utilities with ICF and RWR covering Real Estate. Additionally, several bond ETF's are currently rated as "AAS Recommended Buys" including TLT and LQD.


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