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Monday, August 07, 2006

Elevated Volatility Ahead of Fed Meeting

Friday’s markets exemplified the elevated volatility investors are facing at the moment. A soft job’s data report jumpstarted the trading session until around lunch time. Then, with the heavy hitters leaving early for the weekend, the rally lost steam and profit taking ensued. This schizophrenic market can’t differentiate good news from bad news, which makes for treacherous investing to say the least. With BP shutting down the largest U.S. oil field and the continuation of Mid-East violence, oil and energy will likely be today’s market catalyst.

We continue to view the S&P 500 as the most attractive major market and the Russell 3000 Growth as the most attractive style-box investment, although others continue to slowly strengthen. Real Estate, Energy and Utilities remain among our top rated sectors while Transports and Networking remain among the weakest. The NASDAQ Volatility Index (VXN) as well as all three Put / Call ratios increased due to Friday’s flip-flop activity. Most of the technical indicators we watch reversed slightly, with the exception of the Dow Jones’ MACD and 15-day Relative Strength Index.

Of the 164 Exchange Traded Funds analyzed today, 48 are recommended “buys,” 16 are recommended “sells” and 100 have a “neutral” recommendation. Eleven ETF’s were upgraded this morning to a recommended “buy” status while five shifted to a recommended “sell” status. All of the upgrades represent either style-box, international or bond investments. Large-Cap Blend and Large-Cap Value remain among our strongest rated market segments. Investors looking to allocate a portion of their portfolios into these areas should look at the iShares NYSE 100 Index (NY) or the iShares S&P 100 Index (OEF).

Of the 84 Fidelity Select Mutual Funds analyzed today, 22 are recommended “buys,” 11 are recommended “sells” and 51 have a “neutral” recommendation. Ten Fidelity Select funds within the Financial Services, Real Estate and Bond groups were upgraded this morning to a recommended “buy” status. Four funds shifted down to a recommended “sell” status within the Mid-Cap Growth and Natural Resources Groups. I’ve been closely monitoring Financials and Financial Services over the last couple of weeks hoping for the sectors to exhibit more leadership heading into this weeks Fed meeting. It’s still too early to tell if these sectors will lead the markets out of the current trading range, but investors looking to allocate into Financials might look to the Fidelity Select Brokerage & Investment Fund (FSLBX). The Real Estate sector is also worth monitoring as it’s currently the highest rated sector in our Market Overview analysis. The Fidelity Select International Real Estate Fund (FIREX) presents an option for investors looking to allocate into international real estate. Fidelity funds, although well-managed and popular, are prone to be slow in responding to short and intermediate term directional changes in the markets. Investors seeking short-term alpha-generating investments would be better served looking to ProFund or Rydex mutual funds along with ETF’s or stocks.

Of the 48 ProFund Mutual Funds analyzed today, 8 are recommended “buys,” 10 are recommended “sells” and 30 have a “neutral” recommendation. There were no ProFunds upgraded to a recommended “buy,” only one that shifted to a recommended “sell,” but several that are now recommended “neutral.” The ProFund Basic Materials Fund (BMPIX) joins the Industrials (IDPIX), Internet (INPIX) and Wireless (WCPIX) ProFunds as those sector funds currently labeled recommended “sells.”

Of the 47 Rydex Mutual Funds analyzed today, 9 are recommended “buys,” 10 are recommended “sells” and 28 have a “neutral” recommendation. Similar to ProFunds, there were no Rydex mutual funds upgraded to “buy” status but there are two that shifted to a recommended “sell” including the Rydex Mid Cap Growth Fund (RYBHX).

In terms of stocks, 31 were upgraded to “buy” status while 60 shifted to recommended “sell” status. Various upgrades include: Precision Castparts Corp. (PCP); First Horizon National Corp. (FHN); KeyCorp (KEY); CSG Systems International Inc. (CSGS); General Mills Inc. (GIS); Applera Corp-Applied Biosystems Group (ABI); Caterpillar Inc. (CAT); Gen-Probe Inc. (GPRO); ViaSat Inc. (VSAT); C&D Technologies Inc. (CHP).

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