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Tuesday, August 01, 2006

Market Health is Still Improving...Slightly

Those investors hoping for a continuation of last week’s rally are likely a bit disappointed after a slight retreat in yesterday’s trading session. Whether from profit-taking or bullish reluctance, the markets struggled all day to keep their collective heads above water, finally succumbing to heat exhaustion by the closing bell. The tug-of-war between bulls and bears, rate-hike proponents and opponents and/or Israeli and Hezbollah fighters is weighing heavy on investor sentiment. With a scorching heat wave and the emergence of Tropical Storm Chris, the markets will likely stumble for the remainder of the week. Despite the choppy waters, I still believe alpha is available for those investors looking for short-term holdings.

Yesterday I mentioned that of the ten major market derivatives I analyze, none were “Buy” recommendations, although eight were “Neutral” rated. There was slight improvement overnight, with the S&P Small Cap (IJR) now the lone “Sell” recommended market. I’m still partial to the NYSE 100 (NYC) and the S&P 500 (IVV), as those markets possess the highest rating scores. With such a preponderance of markets rated “neutral,” I’m led to believe that overall market health is slowly improving, yet by no means ripe for aggressive investment.

The Russell 3000 Growth (IWW) and S&P Large Cap Value (IVE) derivatives represent the highest-rated style-box investments, yet they fall short of being recommended “Buys.” Yesterday’s markets did little to dissuade my views that there remain no style-box investments clearly out-performing the others, and that investors looking for alpha have a better opportunity within sectors than they do in major markets or style-box investments.

With yesterday’s gigantic run-up in natural gas prices, it’s no surprise that Energy (IYE) is re-emerging as a recommended "Buy" sector, now joining Real Estate (IYR), Utilities (IDU), Healthcare (IYH) and Telecommunication (IYZ). I’m continuing to watch a modest strengthening in Financials (IYF) as well as several technology sectors such as Semiconductors (IGW) and Software (IGV). I believe that once a rally developes, whenever that is, that these sectors will provide investors with a great opportunity to invest in alpha.

There are, however, several sectors that remain weak and consequently are recommended “Sells.” These include Transports (IYT) which is still reeling from a disastrous week, U.S. Industrials (IYJ) and Consumer Services (IYC).

It appears that there is some profit-taking today within natural gas, but based on the Utility sectors overall performance these past few weeks, a tropical storm on the horizon and more heat to come, investors seeking to add alpha via one or two holdings might begin with Nicor Inc. (GAS) or Questar Inc. (STR). An oil & gas exploration company worth noting is Pioneer Natural Resource Co. (PXD) which was upgraded this morning and still trades below its 200-Day Moving Average. In terms of Telecommunication companies, Inter-Tel Inc. (INTL) was upgraded this morning to a recommended “Buy.” I also noticed an upgrade in Noven Pharmaceuticals Inc. (NOVN), providing a position for investors looking to add alpha with a pharmaceutical holding.

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