Portable Alpha Daily

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Wednesday, August 02, 2006

Will Financials Take the Lead?

Welcome back those of you returning to my blog for a second day. After a huge pop in viewers yesterday, I was curious how many found my blog informative and worthy of another look. From the looks of it so far, a solid percentage of you do, which is great. My goal is to post by 10:00 am EST on Monday, Wednesday and Friday. Tuesday and Thursday posts will be later since that’s when I publish the newsletter. It also depends on if the market data we subscribe to has any anomalies, which obviously need to be examined and understood (i.e. splits, mergers etc). Analyzing over 1700 securities takes a bit of time as you can imagine.

The Major Markets and Style-Box derivatives all remain either “Neutral” or “Sell” rated. However, in addition to Real Estate (IYR), Utilities (IDU), Healthcare (IYH), Telecommunication (IYZ) and Energy (IYE) as sectors listed yesterday that are recommended “Buys,” Non-Cyclicals (IYK) has joined the list as a recommended “Buy.” This means that a third of the sectors that I analyze daily present areas of buying opportunity for generating alpha. Financials (IYF) and Financial Services (IYG) continue to be “neutral” rated as does Software (IGV) and Biotechnology (IBB).

Sectors that remain weak and consequently are recommended “Sells” include Transports (IYT), Networking (IGN), U.S. Industrials (IYJ) and Consumer Services (IYC) among others.

As I’ve mentioned before, I think that in order for the markets to emerge from the present trading range and begin the journey to the upside, the Financial and Financial Services sectors will need to exert some leadership. I’m not implying that banks are the only ticket, although Bank of New York Co. Inc. (BK) is a now a recommended “Buy.” But I certainly think something can be said within the investor sentiment arena when Goldman Sachs Group Inc. (GS), Bear Stearns Companies Inc. (BSC), Merrill Lynch & Co. Inc. (MER) and others show some strength. This may sound counter-intuitive to some, especially considering the impact rate hikes have on banks, but it’s important to remember that the companies listed above do much more than just lend money. Investors or managers that generate the most “alpha” often do so not because they follow the crowd, but because they find areas to invest in that are outside the “collective” box.

For those of you looking for a more “agreed upon” sector to invest in, stick with Energy and Natural Resources. God forbid we get hit by a hurricane, and I seriously mean that living on the East coast, but if we do, energy prices will likely continue to go up. Not to mention the conflicts in the Middle East, although to a certain extent I think they might already be priced in. I think Energy has become the “go-to” investment, the area where we look when nothing else is blatantly obvious. Unfortunately, that means Energy currently offers little alpha to investment portfolios. But if you’re still looking for an energy investment, the Fidelity Select Natural Resources Fund (FNARX), the Rydex Energy Fund (RYEIX) and the iShares S&P Global Energy Sector ETF (IXC) are recommended “Buys” for those looking for energy plays outside of specific stocks.

I still like Utilities (IDU) with Public Service Enterprise Group Inc. (PEG) and Wisconsin Energy Corp (WEC) as newly up-graded recommended “Buys” today. I have no idea how long this heat wave will last, but seeing as how it’s only the second day of August, I don’t see the need for air conditioning waning anytime soon.

Although the Semiconductor (IGW) sector remains a recommended “Sell,” it has performed well over the last week and might provide a good opportunity for those investors looking for a speculative position. ATMI Inc. (ATMI) found its way onto my radar this morning not only because it’s a newly upgraded “Buy,” but because it’s trading below its 200-Day Moving Average.


  • If the financials are accompanied by big cap tech as market leaders I might be inclined to buy into the thesis that a new bull cycle has started but financials mixed with a couple other sectors would probably best be read as just another shift in the rolling bear market we've been experiencing virtually since 1998: Taken advantage of for profit to be sure but nothing to get too worked up about.

    By Anonymous RW, at 8:30 PM  

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