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Tuesday, August 15, 2006

Software

Wall Street put forth a valiant effort yesterday with an intra-day Dow rally of over 115 points. Word of a cease-fire in the Middle East fueled the markets and brought the price of oil down to $73.53. Reluctance on the buy-side however resulted in light trading volume, causing the Dow rally to lose momentum and close with a measly 10 point (0.09%) gain. The S&P 500 added 0.12% while the NASDAQ gained 0.55%.

The enigmatic market continues to baffle investors trying to determine which direction, if any, it will take over the next few weeks and months. For the rest of this week, expect the market to move in response to today’s positive Producer Price Index report and more importantly tomorrow’s Consumer Price Index report as well as Q2 earnings statements from big Retail.

In terms of technical analysis, I’m continuing to observe a modest strengthening within our eight indicators as compared to one month ago. However, only three of the eight indicators are stronger than last week’s levels. Investors should note that the DJIA MACD crossed below its 9-Day Moving Average after last Friday’s close.

The long-term signal, bearish since April 25th, is improving every so slightly. I’m not exactly sure how much of a rally is needed to initiate a more rapid bullish shift, but I’d venture to say at least a week of solid market performance and further solidification of the technicals. And with the markets barely able to put two good days together, one to two weeks of positive movement seems like a long shot…for the moment. As such, I continue to recommend an asset allocation of between 0% and 25% equities within the alpha generating portion of an overall investment portfolio.

My analysis continues to illustrate weakness within the Russell 2000 as well as the S&P Mid- and Small-Cap markets. The NASDAQ, which I analyze using QQQQ and ONEQ, is now a “neutral” rated sector. The iShares S&P 500 (IVV), iShares NYSE 100 (NYC), iShares S&P 100 (OEF) and the Dow Jones Industrials Diamond Trust (DIA) are the only major market derivatives that are recommended “buys” currently. Large Cap Value, as represented by the Morningstar Large Cap Value ETF (JKF), is the only “buy” recommended style-box investment.

Sector investments continue to supply the majority of alpha generating potential, with five of the eighteen currently “buy” recommended. The strongest sectors are Utilities (IDU) and Software (IGV) while those at the bottom include Biotechnology (IBB) and Transports (IYT).

Our top two software stocks are NVIDIA Corp. (NVDA), which was upgraded to a “buy” on August 8th, and Altiris Inc. (ATRS), which was upgraded on August 1st. Other software companies listed as “buy” recommended are: Electronic Arts Inc. (ERTS); Symantec Corp. (SYMC); Activision Inc. (ATVI) and Microsoft Inc. (MSFT). An option for Investors looking for a software sector mutual fund is the Fidelity Select Software & Comp. Fund (FSCSX) which was upgraded to a “buy” on July 27th.

Have a great day!

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