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Tuesday, August 22, 2006

Real Estate

Five of the eight short-term technical indicators improved overnight with the NYSE Advance / Decline Line and the Dow Jones Industrials Average’s 15-Day Stochastic and 15-Day Relative Strength Index weakening. All eight of the indicators are higher than both last week’s and last month’s levels while all but one, the S&P 500 On-Balance Volume % are higher than last year’s level. The Market Volatility Index (VIX) is nearly 17% lower than last week’s reading, but the NASDAQ Volatility Index (VXN) is slightly higher.

My long-term signal, bearish since April 25th, has shown significant improvement over the last two weeks or so, but it still remains one or two days away from indicating a bullish reading. Basically I’m waiting for the difference between two exponential moving averages of the NASDAQ composite to shift from negative to positive territory. Even if I continue to see moderate declines due to profit-taking or geo-political influenced reluctance on Wall Street, I still think our model will continue its positive trend throughout the week meaning I’ll probably adopt an official bullish market view within the next few days. However, that doesn’t necessarily mean I’m going to recommend another increase in equity allocation just yet, as I feel that continued caution and measured exposure is the best strategy over the next few weeks.


Despite last week’s rally, there are only three Major Markets currently holding a “buy” recommendation: NYSE 100 (NYC), S&P 100 (OEF) and S&P 500 (IVV). However, there are no market indexes that are currently “sell” recommended, which is perhaps a more clairvoyant indication of the emerging strength in the broad-markets.

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

With ten different sectors currently “buy” recommended, generating alpha by actively managing within sectors remains the easiest and most efficient strategy. Energy (IYE) and Natural Resources (IGE) vaulted back to the top after an increase in oil and gas over the last week. With the current geo-political climate focused on oil, investors should maintain exposure to these sectors for awhile, but more within the long-term component of the investment portfolio, and not the actively managed portion.

Investors looking for alpha through active management of sector investments should continue to focus on Technology (IYW), Semiconductors (IGW), Software (IGV) as well as Real Estate (IYR) and Utilities (IDU).

Investors looking to generate alpha via Exchange Traded Funds should really be looking at international funds such as iShares S&P Latin America 40 Fund (ILF) which I highlighted in yesterday’s post. I analyze thirty-six international ETF’s and thirty-three of them are “buy” recommended this morning. ILF is the strongest rated fund, but at least eight others have rating scores higher than ten, which indicates significant trend development and strengthening technicals. Among the strongest are: MSCI EMU Index (EZU); iShares S&P Topix 50 (ITF) and Mexico Webs Index (EWW). In fact, two of those funds are currently held in our model ETF portfolio.

An interesting area for generating alpha is Real Estate, which I analyze using the
Dow Jones iShares Real Estate Fund (IYR). There’s a lot of discussion in the media about the weakness in homebuilders and the real estate bubble etc. etc. And I certainly agree with some of the analysis. That’s not to say however that investors should completely avoid real estate investments, which I feel is generating significant amounts of alpha at the moment. In fact, IYR was up over 2% last week and is up over 4% for the last month.

I initially mentioned Real Estate in a
mid-July post as a sector upgraded to a “buy” status and one that should be kept on the radar. I still think investors looking to invest in real estate should narrow their focus to REIT’s such as Public Storage Inc. (PSA), Essex Property Trust Inc. (ESS) or Shurgard Storage Centers Inc. (SHU) which are all highly rated this morning. Another solid real estate company is Kilroy Realty Corp. (KRC) which was upgraded to a “buy” in early-July and has done well since.

For investors looking for diversified exposure to Real Estate, funds such as the iShares Cohen and Steers Realty Majors (ICF), the Vanguard REIT Index VIPERs (VNQ) and the streetTRACKS Wilshire REIT (RWR) are solid solutions, as are the Rydex Real Estate (RYHRX) and the ProFunds Ultra Real Estate (REPIX) funds.

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