Portable Alpha Daily

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Tuesday, August 08, 2006

Big Day...Perhaps

Seven of the eight short to intermediate term technical indicators I look at continue to show slight improvement over the last month with the S&P 500 On-Balance Volume Percentage indicator the only one weakening. However only five of the indicators have improved upon last weeks levels with the Dow Jones’ 21-Day Breadth Indicator, 21-Day Volume Ratio, and 15-day Relative Strength Index weakening.

The long-term technical indicator continues to dictate a defensive posture, although it’s uncertain how much today’s market reaction to the Fed meeting will impact it. My gut tells me that the Fed will pause today but that hawkish commentary will allude to possible hikes in the future. And as such, the reaction on Wall Street is a toss up. Either way, whatever happens today will probably be short lived. As hard as I’ve tried to convince myself that the market might develop a bullish trend, I just don’t see it in the cards yet.

For the past few weeks I’ve recommended that investors wishing to generate alpha should only allocate between 0% and 25% of the “alpha-generating” portion of their portfolios to stocks. Again, it’s my belief that average investors willing to actively manage a portion of their investment portfolios can generate alpha and outperform the markets. Assuming the Fed pauses today, I’d be inclined to adjust the allocation recommendation closer to 50%, but that all depends on the FOMC meeting and how the market reacts over the next few days.

Going forward, I think it’s crucial for investors to have a clear understanding of the market’s pre-Fed meeting status before they can begin to allocate into a potential rally. The analytics, again which are designed to highlight the market segments currently providing the most alpha, have already begun to indicate specific sectors and style-box investments that investors should look to. In terms of Major Markets, the S&P 500 remains the lone “buy” recommendation, while the Russell 3000 Growth and S&P Large Cap Value are the two highest-rated style box investments.

Those sectors which I see as providing alpha continue to include Energy, Natural Resources, Real Estate, Utilities, Telecommunication, Healthcare, and Non-Cyclicals. The weakest rated sectors include U.S. Industrials, Biotechnology, Networking and Transports. Those investors looking to generate alpha by short-selling equities have plenty of options within those bottom-ranked sectors.

Various equities labeled as recommended “Buys” today include: iShares MSCI Netherlands Index (EWN); iShares MSCI Austria Index (EWO); Fidelity Select Gold Fund (FSAGX); Fidelity Intermediate Government Bond Fund (FSTGX); ProFunds Precious Metals Fund (PMPIX); Rydex Large Cap Value (RYZAX); AES Corp. (AES); Black Hills Corp. (BKH); Andrew Corp. (ANDW); 4 Kids Entertainment Inc. (KDE); and Motorola Inc. (MOT).


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