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Thursday, August 31, 2006

Opportunities Increase for Beta Exposure

All eight of my short-term, technical indicators strengthened overnight. Seven are higher than last week’s levels, and eight are again higher than both last month’s and last year’s reading. I like what I’m seeing over the near term, with stocks again able to accomplish multi-day, consecutive gains. It wasn’t too long ago when such gains were newsworthy, and a continuation of this trend would serve as an excellent foundation for a late-year rally. I’m expecting the institutional investors to jump in next week, bring significant volume with them, and hopefully keep the markets moving in the right direction. That’s assuming that the Fed is indeed done increasing rates. In terms of volatility, we’re seeing significant reductions in the NASDAQ Volatility Index (VXN) as well as the Total and Index Put / Call ratios.

The long-term signal, bullish since August 23rd, continues to strengthen, further solidifying our conservative bullish sentiment. I’m going to wait until next week before a possible increase in equity allocation within the alpha-generating portion of an investment portfolio. Until then, I’d stick with an asset allocation strategy of between 50% and 75% equities.

I saw a huge jump this morning in the Major Markets currently holding a “buy” recommendation. Over the last few weeks the NYSE 100 (NYC), S&P 100 (OEF) and S&P 500 (IVV) have been the dominant markets that investors should look to for beta exposure. We added seven more markets this morning, for a total of ten, which the analytics indicate are generating alpha. The majority of these markets still have relatively weak rating scores, so I wouldn’t necessarily act on the data just yet. But it does paint an interesting picture regarding the immediate health of the market.

Large Cap Value (JKF) remains a solid style-box investment, but Small Cap Core (JKJ) and Small Cap Value (JKL) investments are also newly “buy” recommended investments. This development is exceptionally interesting, since at this point in the business cycle, small caps typically pass the torch to large caps.

There are ten different sectors currently “buy” recommended including: Semiconductors (IGW), Real Estate (IYR), Technology (IYW), Software (IGV), Networking (IGN), Healthcare (IYH), Utilities (IDU), Telecommunication (IYZ), Non-Cyclical (IYK) and Biotechnology (IBB).

Energy (IYE), Transports (IYT) and Natural Resources (IGE) all remain “sell” recommended sectors, although oil prices will likely go up today due to Iran’s refusal to comply with UN regulations. You might expect transports to improve based on lower oil prices, but in actuality, most of those companies rely on diesel or jet fuel, which are less responsive to changes in oil price.

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