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Thursday, August 03, 2006

Portable Alpha vs. Day Trading

I think it’s important for me to explain, periodically if need be, that investing in alpha does NOT mean day trading. I am not a day trader nor do I advocate it as the only strategy available for investors looking to generate alpha. Of course day trading can be very profitable and I’m not against it, it’s just not how I invest. The purpose of including specific “buy” or “sell” recommendations in each post isn’t to encourage day trading, but rather to give viewers an idea of how our analysis works and how it can be applied by anyone wanting to generate alpha for their own portfolio. What we do is enable investors to identify the segments that are out-performing the market, either based on short, intermediate, or long-term returns, and then isolate securities within those segments for investment.

On the other hand, I’m not a proponent of a buy and hold strategy for the entire investment portfolio. In fact, since I’m a trend-following, quantitative investor, I’m not really a fan of buy and hold at all. I certainly agree that portfolios should include a certain percentage of long-term holdings that provide diversification and exposure to the general market, but I also feel that investors are better served by being flexible and willing to sell when specific stop-loss or profit-protection rules are triggered. Because of this belief, we include a “Sell-Limit Watch” for equities included in the newsletter.

So what does the analysis tell me today? Overall, based on the analytics, I’m seeing a very gradual improvement in the market. Last Thursday, only five of the major market derivatives analyzed were rated “neutral.” Today there are eleven with six shifting from a "sell" rating. Similarly, there were only five style-box derivatives rated “neutral” for last Thursday; today there are nine with three shifting from a "sell" rating. As I’ve mentioned before, a “neutral” rating equates to a “hold” and should not be construed as a recommendation to buy. But the market is improving and I remain cautiously optimistic going into next week’s Fed meeting.

The Telecommunication (IYZ), Software (IGV) and Semiconductor (IGW) derivatives have performed well over the last week, gaining 2.59%, 2.67% and 2.71% respectively. A lot of people are talking about Natural Resources (IGE) and Energy (IYE), and I’ve included those sectors in previous posts. But I think it might be time to look elsewhere for alpha. The Fidelity Select Telecommunications Fund (FSTCX) was upgraded this morning. Polycom Inc. (PLCM) and Cincinnati Bell Inc. (CBB) were also upgraded. Altiris Inc. (ATRS) was upgraded yesterday within the software sector. Adobe Systems Inc. (ADBE) has had a fantastic week yet still trades below its 200-Day Moving Average. Affiliated Computer Services (ACS) and Automatic Data Processing (ADP) were also recently upgraded. Finally, several insurance companies were upgraded last night including Cigna Corp. (CI), MBIA Inc. (MBI) and Everest Re Group Ltd. (RE).

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