Portable Alpha Daily

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Wednesday, August 09, 2006


By now everyone knows that the Fed paused yesterday, that inflation remains a concern, that economic growth is slowing, that the housing market is in serious trouble, that the price of oil is going up while the dollar is going down…etc., etc., etc. Personally, I’m more concerned with how to adjust allocations and strategy as a result of yesterday than I am with the economic impetus of Bernanke. That’s certainly not to say that the Fed’s motivation is insignificant, I just don’t think I’m in a position to analyze it. However, for those of you interested, check out Greg Mankiw, Larry Kudlow or Econbrowser for commentary from an economist’s point of view.

Now the question shifts from whether or not the Fed will raise rates to how should a portfolio be allocated going forward. With yesterdays volatile reaction to the Fed’s decision, it no surprise that our short-term indicators weakened further. However, our long-term indicators continued their slow and steady bullish march. We’re still a long way, perhaps several weeks, from our long-term indicator officially turning bullish, but I still believe that the foundation is developing for a rally within the third and fourth quarters.

Our analysis continues to illustrate a weakening within the NASDAQ, Mid- and Small-Cap markets. If investors haven’t done so already, they should shift out of these areas and into Large Caps. Investors need to maintain exposure to the market in general and the easiest way to do so is invest in Index correlated funds such as the iShares NYSE 100 (NYC) and the iShares S&P 500 (IVV).

We continue to view Large Cap Value, as represented by the iShares S&P 500 Value Index (IVE) derivative, as a style-box investment with great potential for generating alpha over the next few months. Funds such as the Morningstar Large Cap Value ETF (JKF), the Fidelity Large Cap Value Fund (FSLVX) and the ProFund Large Cap Value Fund (LVPIX) represent excellent options for investors.

Eight of the eighteen sectors we analyze are “buy” recommended. Financials (IYF), a sector which I’ve discussed numerous times over the last few weeks, is in my opinion an excellent sector for generating alpha. Raymond James Financial Inc. (RJF) was upgraded this morning as was Fifth Third Bankcorp. (FITB), Fidelity Equity Income (FEQIX) and iShares S&P Global Financial (IXG) among others. Tomorrow I’ll discuss the strengthening of the international markets as areas of alpha generation. Have a good one.


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