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Thursday, August 17, 2006

Semiconductors

After weeks of “rally-and-recede” Wall Street trading, the markets finally held onto intraday gains for two days in a row. Benign inflation data coupled with falling crude futures sent stocks sharply higher and pushed the Dow Jones industrials to its highest level in three months. The S&P 500 index added 9.85, or 0.77 percent, to 1,295.43 while the NASDAQ composite index gained 34.53, or 1.63 percent, to 2,149.54. Bond yields fell to 4.87 percent from 4.93 percent, the dollar declined against major currencies, and gold prices rose.

The consumer price index rose 0.4 percent in July, slightly higher than June's 0.2 percent increase. But the “core” CPI rose just 0.2 percent, less than the 0.3 percent economists expected. In total, both economic reports indicate a drop in inflation pressures, resulting in a potential end to Fed rate hikes.

Seven of the eight short-term technical indicators improved overnight with the S&P 500 On-Balance Volume % the only indicator not cooperating. Similarly, seven of the eight are stronger than last week’s levels while all eight have shown significant strength over last month’s levels. The investor sentiment indicators continue to improve with the VIX, VXN, and Put / Call ratios improving over the last week.

The long-term indicator, bearish since April 25th, has made significant progress over the last few days heading into a bullish reading. My long-term macro model is a proprietary combination of trend, sentiment and technical indicators that must meet specific pre-determined criteria in order to assume a bullish stature. It’s getting very close to that shift, but I need continued improvement within the NASDAQ and NYSE composites before I can be officially bullish. Based on the improvements made over the last two days, it looks like that shift could take place early next week, assuming the markets don’t give all of their gains back today and tomorrow to profit taking.

Because of the strong market activity over the last few days as well as the continuing improvement in my market models, I’m increasing the asset allocation recommendation for the alpha generating portion of the overall investment portfolio to between 50% and 75% equities. Remember that I’m not officially “bullish” just yet and that my recommendation could shift back down to lower levels if the market reverses.

The major markets have all shown improvement over the last few days, with no markets rated as recommended “sells.” However, there are still only a few market derivatives which are “buy” recommended including the iShares S&P 500 (IVV), iShares NYSE 100 (NYC), iShares S&P 100 (OEF) and Dow Jones Industrials Diamond Trust (DIA). The NASDAQ, represented by QQQQ and ONEQ, is still rated “neutral” but is showing significant strength and potential as an alpha-generating market.

The two style-box investment derivatives that are “buy” recommended are Large Cap Value (JKF) and Large Cap Core (JKD). I noted several weeks ago that large caps would hopefully exhibit leadership out of the summer trading range and into the third and fourth quarter rally.

There are now ten sectors, out of eighteen in total, that are “buy” rated. With the strength of the NASDAQ over the last few days, it’s no surprise that Software (IGV) and Semiconductors (IGW) are the top two rated sectors. What’s really interesting is that Energy (IYE) and Natural Resources (IGE) are now the bottom rated sectors in terms of alpha-generating potential, with both being “sell” recommended.

Investors looking to generate alpha through software or semiconductor companies have a lot of options. There are six software equities and over twenty semiconductor equities listed as “buy” recommended this morning. I discussed software in a previous post, so today I’ll highlight several semiconductor companies that are rated high within my analytic as alpha-generating investments.

The top three semiconductor companies are MEMC Electronic Materials Inc. (WFR), Integrated Device Technology Inc. (IDTI) and Microsemi Corp. (MSCC). All three have rating score above 25, indicating solid trend development and technical support. WFR was upgraded to a “buy” on August 15th, IDTI was upgraded on August 9th and MSCC were upgraded on August 8th. Since being labeled recommended “buys,” WFR is up nearly 4%, IDTI is up 6.48% and MSCC is up 11.58%.

There are several semiconductor companies such as Actel Corp. (ACTL), Exar Corp. (EXAR) and Pericom Semiconductor Corp. (PSEM) that have yet to develop strong rating scores but are carrying a “buy” status this morning. Pay special attention to PSEM since it’s trading below its 200-Day Moving Average. These companies are beginning to exhibit bullish trend development, and assuming that the NASDAQ continues to strengthen, are potential alpha-generating investments.

Things are beginning to get interesting in the markets…finally!! I’m heading to Wilmington, NC for a golf trip this evening so I won’t post anything tomorrow. Have a great weekend.

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