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Thursday, August 24, 2006

Metals

The U.S. stock markets traded lower on Wednesday amid concerns over existing home sales data and Iran’s failure to satisfy the U.N. Resolution. Existing home sales fell more than 4% in July to the lowest level since the beginning of 2004. The magnitude of the decline surprised investors and further agitated worries of a housing market crash and consequent recession. The inventory of homes for sale jumped 3.2%, the largest one-month rise ever. The Commerce Department reported this morning that new orders for durable goods declined by $5.3 billion in July and the Labor Department reported that the number of American’s filing unemployment benefit claims last week declined to 313,000.

The Dow Jones industrials closed down 42 points, or 0.4%, to 11,298. The Standard & Poor's 500 Index was down 5.8 points, or 0.5%, to 1,293, and the NASDAQ Composite Index was off 15.4 points, or 0.7%, to 2,135. Overseas, the Nikkei lost 1.3% but the European markets rebounded slightly despite light volume. The dollar weakened against the Euro due to a better than expected German business sentiment report.

Seven of my eight short-term technical indicators weakened overnight with the 9-Day Moving Average of the Dow Jones Industrial Average’s MACD the only indicator improving. Four of the eight indicators are higher than last week’s levels while seven are higher than last month’s reading. The S&P 500 On-Balance Volume % is the only indicator that is not beating levels from one year ago. The Market Volatility Index (VIX) and NASDAQ Volatility Index (VXN) continue to climb as does all three Put / Call ratios.

My long-term signal, bearish since April 25th, finally turned bullish overnight after several weeks of slow but steady improvement. Even though I’m now officially “bullish,” I am however an extremely cautious bull. The markets are as unpredictable as ever, so adopting an overly-aggressive strategy with current market conditions as they are might not be prudent. Despite the long-term macro model turning bullish, I continue to recommend an asset allocation strategy of between 50% and 75% equities for the alpha generating portfolio of the investment portfolio.

There remain only three Major Markets currently holding a “buy” recommendation: NYSE 100 (NYC), S&P 100 (OEF) and S&P 500 (IVV). Additionally, the S&P 600 (IJR) index reverted to a “sell” recommendation.

I still favor Large Cap Value (JKF) as the only “buy” recommended style-box investments, but I continue to see modest improvement within both the Large Cap Growth (JKE) and Large Cap Core (JKD) arenas.

There are nine different sectors currently “buy” recommended including: Real Estate (IYR), Utilities (IDU), Software (IGV), Financial Services (IYG), Telecommunication (IYZ), Financials (IYF), Technology (IYW), Healthcare (IYH) and Non-Cyclical (IYK). Energy (IYE), a sector I discussed yesterday, reverted to a “neutral” recommendation after further oil price declines. To be perfectly honest, I think it’s much easier to generate alpha in other sectors as opposed to energy at the moment. Most investors should have energy exposure within the long-term, buy-and-hold components of their investment portfolios and not as much within the actively managed portion, unless of course you have a market model that accurately predicts the thoughts of Iranian President Mahmoud Ahmadinejad.

Metal funds and stocks have generated significant alpha over the last few weeks and continue to provide opportunities for investors. There are twelve stocks or funds that are “buy” recommended in this morning’s newsletter related to the processing and/or fabrication of precious and non-precious metals. One of my favorites is Wolverine Tube Inc. (WLV), which our analytics upgraded to a “buy” on July 19, 2006, has done surprisingly well over the last one week and one month, gaining 25.58% and 37.15% respectively. Currently, the two highest rated metal companies are Aleris International Inc. (ARS) and Maverick Tube Corp. (MVK). I also like three metals funds including the Rydex Precious Metals Fund (RYPMX), the ProFunds Precious Metals Fund (PMPIX) and the Fidelity Select Gold Fund (FSAGX).

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