Portable Alpha Daily

Google
 
Web alpha-advisor.com

Friday, September 29, 2006

Reflections on Q3 Alpha

As the quarter comes to an end, I’d like to take a moment to reflect on some of the ways our analytics generated portable alpha in Q3 and how, based on those same analytics this morning, it might be found in Q4. I emphasize might because as an active manager I know better than to make bold predictions for the next three months.

We spent the majority of Q3 in a defensive posture since our long-term macro model turned bearish on April 28th 2006 and didn’t turn bullish until August 23rd. This turned out to be an excellent switch as alpha was easily generated by the performance of several inverse index funds through May and June. FYI – we only use the long-term macro model within the AAS Model Fund Portfolios.

Looking back to our first newsletter of Q3, there were no “buy” recommended major market or style-box derivatives. In fact, there were only two “buy” recommended sectors – Real Estate and Utilities which provided, and in some cases continue to provide, significant alpha for investors. However, we were beginning to again see the alpha-generating potential of inverse funds, which remained among our top ten rated investments until mid-July.

By the end of July the analytics had three more “buy” recommended sectors: Energy, Healthcare and Telecommunications. We also had five “short-sale” recommended sectors with Transports being the weakest. The long-term macro model was still bearish and we still recommended between a 0% and 25% equity allocation into the alpha-generating portion of the overall investment portfolio. The analytics had yet to provide “buy” recommendations for any of the major-market or style-box derivatives.

Towards mid-August the markets really started to take off. At this point, the analytics had four “buy” recommended major market derivatives including NYSE 100, the S&P 100, the Dow Jones Industrials Diamond Trust and the S&P 500. Large Cap Value was the one “buy” recommended style-box derivative, while Utilities, Software, Telecommunication, Healthcare and Non-Cyclical were the five “buy” recommended sector derivatives.

Our long-term macro model was still bearish, but improving rapidly. One of the hardest aspects of being a quant investor and market technician is not overriding the signals when it becomes clear that they will eventually make a shift. The markets were drinking jet fuel, buying opportunities were popping up left and right, yet the model was still a week or so behind and as such the model fund portfolios were still invested in cash or inverse funds. It can be frustrating, but sticking with the discipline, in my opinion, is a crucial component of successful investing.

By late-August, the macro model had turned bullish and we were recommending between 50% and 75% equity allocation within the alpha-generating component of the portfolio. The large cap major market and style-box derivatives were clearly dominant and there were eight “buy” recommended sectors. By this point, Natural Resources were a “short-sell” recommended sector, with Energy soon to follow. The AAS Model Fund portfolios were 100% invested and the Model Stock Portfolio was nearly 60% invested.

The September 11th newsletter produced six “buy” recommended major market derivatives, two “buy” recommended style-box derivatives and nine “buy” recommended sector derivatives. Real Estate and Technology dominated the top ten fund investments while the top ten stocks ranged from Financial Services and Computers to Retail to Aerospace. The rally was broad-based and things were looking up.

So here we are at the end of a very good quarter trying to figure out what to look for over the next three months to generate alpha. I’m not going to predict where the alpha will be, simply because I can’t do that. But I can share my sentiment and some of today’s analysis.

There are two components of investing in portable alpha – adequate, cheap market exposure (beta) and non-correlated investments outperforming the benchmark (alpha). Based on today’s analysis, we recommend beta from the NASDAQ 100 (QQQQ), the Fidelity NASDAQ Composite Index (ONEQ) and/or the S&P 100 (OEF). Narrowing that down further is a recommendation for the Large Cap Core (JKD) derivative. Alpha can continue to be found in Software (IGV) and Financial Services (IYG). This is just an observation, but Energy (IYE) has shifted up from a “sell” recommendation to a “neutral” recommendation. That doesn’t mean anything yet, but it’s something I’m going to watch over the next few days.

In terms of my sentiment, I’m still bullish. However, I’m not going to be surprised to see a pull-back next week as profit-taking ensues. The first few earnings releases will be very important in terms of dictating how the market moves over the next quarter. If we see solid earnings, I don’t see any reason why the markets won’t continue the trend. If, however, the slowing economy is beginning to make a bigger than expected impact on margins, things might go downhill very quickly. Have a great weekend!

Beta Exposure and Portable Alpha Generation

Top Rated Major Market Derivative – NASDAQ 100 (QQQQ)

Top Rated Style-Box Derivative – Morningstar Large Cap Core (JKD)

Top Rated Sector Derivative – iShares Dow Jones Software (IGV)

Today’s Top “Buy” Recommended Stocks
  • CPI Corp. (CPY)
  • Gymboree Corp. (GYMB)
  • OM Group Inc. (OMG)
  • Veritas DGC Inc. (VTS)
  • American Eagle Outfitters Inc. (AEOS)
Today’s Top “Buy” Recommended ProFund Mutual Funds
  • ProFund Ultra Japan (UJPIX)
  • ProFund Ultra OTC (UOPIX)
  • ProFund Ultra Bull (ULPIX)
  • ProFunds Ultra Sector Technology (TEPIX)
  • ProFunds Ultra Sector Financials (FNPIX)

Thursday, September 28, 2006

"Indexing and the Pursuit of Alpha"

That’s the title of a webcast I listened to yesterday hosted by Gus Fleites of ProFunds. Gus joined ProFunds last summer after formerly serving as senior principal of State Street Global Advisors (SSgA). The hour long presentation is designed to help investors understand how indexing can improve the returns of a diversified portfolio. The webcast covered three very significant components of portable alpha including:

  • Using Beta to generate Alpha
  • Creating Opportunity from Volatility
  • Enhancing Core Investments
As you know I’m a fan of ProFunds most notably because their products fit in very well with our investment strategy (see model portfolio in right margin). They’re on the cutting edge in terms of developing funds and ETF’s that provide inverse and leveraged capabilities for active management and alpha generation. Basically they provide all the tools that an investor needs for portable alpha investing.

For those who missed the webcast, Gus will present it again on October 3rd, 2006 at 4:15 PM EST. I recommend it to any investor, either retail or private, who’s interested in the “portable alpha” concept but not really sure how it works. For information on how to join the meeting, you can call 888-PRO-5717 or contact them via the web.

Short-Term Technical Indicators – Six of the short-term, technical indicators strengthened overnight with the Dow Jones Industrial Average’s 21-Day Breadth and 21-Day Volume Ratio weakening. In order for a new DJIA high to be technically supported, at least within our short-term analytics, the closing price needs to not only be near the top of its 21-day, 3.5% trading bands, but the 21-Day Breadth and Volume Ratio indicators need to be higher than they were on May 10, 2006. Currently, the DJIA close is not close enough to its trading band for these indicators to come into play. But if we continue to see the index gaining on its way to a new high, which I believe will occur sooner rather than later, these indicators will be important with regards to my short-term outlook.

Long-Term Market Model – Bullish since August 23rd.

Investor Sentiment – The VIX and all three Put / Call ratios decreased overnight, but the VXN edged up a bit.

Asset Allocation – 75% to 85% invested within the actively-managed portion of the overall investment portfolio. 15% to 25% in cash or bonds.

Beta Exposure and Portable Alpha Generation

Top Rated Major Market Derivative – NASDAQ 100 (QQQQ)

Top Rated Style-Box Derivative – Morningstar Large Cap Core (JKD)

Top Rated Sector Derivative – iShares Dow Jones Software (IGV)

Today’s Top “Buy” Recommended Stocks
  • CPI Corp. (CPY)
  • OM Group Inc. (OMG)
  • Veritas DGC Inc. (VTS)
  • NVR Inc. (NVR)
  • American Eagle Outfitters Inc. (AEOS)
Today’s Top “Buy” Recommended Fidelity Select Mutual Funds
  • Fidelity Select Brokerage & Investment (FSLBX)
  • Fidelity Select Telecommunications (FSTCX)
  • Fidelity Select Software & Computers (FSCSX)
  • Fidelity Select Retailing (FSRPX)
  • Fidelity Select Financial Services (FIDSX)

Wednesday, September 27, 2006

Investor Sentiment

If the market’s were to react in-line with expectations from the media, the DJIA will likely vault past its all time-high today on it’s way to 12,000 sometime early next week. So maybe that’s a slight exaggeration, but you get the point. Someone should create a Squawk Box Sentiment Indicator, maybe based on how many times one of the anchors mentions “new highs” over say a five minute time-frame.

In reality, a lot of investors use sentiment indicators to gauge the market, ranging from the Investors Intelligence Advisor Sentiment Survey to the Ticker Sense Blogger Sentiment Poll with many in between. Here is the recent poll from Ticker Sense:


Personally, I’m a fan of the Investors Intelligence Survey and I’ve considered including their values in this blog, but I’m fairly certain that would constitute a copyright infringement. I tend to use these surveys as contrarian indicators; when the polls show too many bulls, I normally interpret that as a bearish indication. Looking at the above poll, I’m comfortable in the bullish camp for the time being.

Short-Term Technical Indicators – All eight short-term indicators strengthened overnight (not surprisingly) with seven higher than last week’s levels.

I noticed that when looking at my graphs and charts from certain browsers, the pictures are not very clear, even after they are clicked on. Since I use Firefox, I wasn’t aware of this until yesterday and I apologize. I’ll try to figure out a solution which might include another post later on today. Any suggestions are welcome.

Long-Term Market Model – Bullish since August 23rd.

Investor Sentiment – Yesterday’s activity saw an ease in both the VIX and VXN but modest gains in the Total, Index, and Equity Put / Call ratios.

Asset Allocation – 75% to 85% invested within the actively-managed portion of the overall investment portfolio. 15% to 25% in cash or bonds.

Beta Exposure and Portable Alpha Generation

Top Rated Major Market Derivative – NASDAQ 100 (QQQQ)

Top Rated Style-Box Derivative – Morningstar Large Cap Core (JKD)

Top Rated Sector Derivative – iShares Dow Jones Software (IGV)

Today’s Top “Buy” Recommended Stocks
  • NVR Inc. (NVR)
  • CPI Corp. (CPY)
  • American Eagle Outfitters Inc. (AEOS)
  • Veritas DGC Inc. (VTS)
  • OM Group Inc. (OMG)
Today’s Top “Buy” Recommended Exchange Traded Funds
  • Vanguard Telecom Services (VOX)
  • iShares MSCI Mexico Index (EWW)
  • iShares Goldman Sachs Software Index (IGV)
  • iShares MSCI Spain Index (EWP)
  • Telecom HOLDRs (TTH)

Tuesday, September 26, 2006

How About a Rough Landing?

For those struggling to come to grips with the economic “conundrum” we’re facing, I’d like to share with you a report prepared by Rod Smyth, Bill Ryder and Ken Liu of the Wachovia Securities Investment Strategy Department. These guys, along with their peers in the department, provide weekly commentaries of the economy and investing environment that I find to be very useful. Click here for the entire report in PDF format.

What they’ve done is break down four possible scenarios with regards to either a hard or soft landing and what the implications are for investors. Here is an excerpt of the “Rough Landing” scenario, which I’m fairly certain is the camp that I belong to.
“…growth could fall below 2% over the next few quarters if the housing slowdown affects consumers more adversely than we currently anticipate. This would constitute year-over-year home price declines in many markets and difficulty making interest payments leading to higher default rates...”

“…mounting evidence that this scenario was unfolding would ultimately lead to Fed easing and short-duration bonds would initially outperform at the expense of stocks as investors fretted about a recession. However, as soon as it looked as if rate cuts were going to have a positive effect on the economy, stocks would begin outperforming again…”

Short-Term Technical Indicators – Well, the S&P 500 reached a new five and a half year high yesterday…were you pleasantly surprised too? The problem, however, is that based on one of my short-term technical indicators, yesterday’s high is not technically supported.

What we need to see is not only the S&P 500 closer to its upper band (21-Day, 3.5%) but we need a new On-Balance Volume % high. A recent example of this occurred in late-November 2005. Unfortunately, the technical’s are currently more in line with that of mid-May, and as you can tell from the graph, that’s not very good news over the short-term.

(Click on Graph to Magnify)


Long-Term Market Model – Bullish since August 23rd

Investor Sentiment – On the volatility and investor sentiment front, there was a decrease in the VIX, VXN and Total Put / Call ratios overnight. Conversely, we saw an increase in both the Total and Equity Put / Call ratios. All five indicators are still closer to their 52-week lows than to their high, which indicates not only a bit of complacency, but also a reluctance to make big bets in either direction.

Asset Allocation – 75% to 85% invested within the actively-managed portion of the overall investment portfolio. 15% to 25% in cash or bonds.

Beta Exposure and Portable Alpha Generation

Top Rated Major Market Derivative – NASDAQ 100 (QQQQ)

Top Rated Style-Box Derivative – Morningstar Large Cap Core (JKD)

Top Rated Sector Derivative – iShares Dow Jones Software (IGV)

Today’s Top “Buy” Recommended Stocks
  • NVR Inc. (NVR)
  • CPI Corp. (CPY)
  • Piper Jaffray Companies (PJC)
  • Veritas DGC Inc. (VTS)
  • American Eagle Outfitters Inc. (AEOS)
Today’s Top “Buy” Recommended Rydex Mutual Funds

Monday, September 25, 2006

Updated Archive

FYI – I’ve updated the Alpha Advisor Service, LLC archived newsletter located in the right-hand margin. Now provided is the September 11, 2006 edition of our twice-weekly newsletter which is designed to help both private and professional investors build and actively manage portfolios based on portable alpha. Included in the newsletter are the five model portfolios listed below as well as analysis of over 1700 stocks, funds and ETF's. Click here for a Free 30-Day Trial.

Patience is a Virtue

Outperforming the benchmarks and generating portable alpha will likely be extremely difficult over the next week or so, as I’m expecting the markets to be range-bound and volatile heading into earnings season. In fact, I think the best strategy at the moment is to keep a close watch on any sell-limits or stop-loss values established and postpone any new investing - unless it’s a relatively small, speculative position.

As I mentioned before, bulls appreciate periods like this, when the market consolidates and gets the opportunity to digest the cause and effects of the recent up-trend. I’m expecting the bears to be in control for the time being, with the bulls hopefully preventing any significant reversals from developing. If it becomes obvious that the mid-summer rally won’t continue, either because of oil going up again or hard landing worries escalating, that’s ok. Remember, we have the tools to generate portable alpha in both bull and bear markets, so there’s no point jumping the gun ahead of the trend. Patience is a virtue.

Short-Term Technical Indicators – Six of the eight short-term, technical indicators weakened after Friday’s close. However, the two that I’ve been watching the closest lately, the DJIA 21-Day Breadth Indicator and 21-Day Volume ratio both increased a bit, which is a bullish indication. Overall however, most of the short-term indicators I use have shifted to bearish territory over the last few days, although certainly not enough to warrant a sell-off or overly defensive strategy.

Long-Term Market Model – Bullish since August 23rd.

Investor Sentiment – With oil prices continuing to slide versus worries of a harder-than-expected economic landing, establishing consistent investor sentiment is difficult at best. The bears are going to lean on the economic reports released this week while the bulls will point to the effect of low oil prices on consumer spending going into the historically strong fourth quarter.

The VIX, VXN and Index Put / Call ratio edged up slightly Friday while the Total and Equity Put / Call ratios declined modestly. There was a substantial decrease in volume of both long and short S&P 500 commercial hedges at the CFTC. This indicates that institutional investors are reluctant to make big bets in either direction at the moment.

Asset Allocation – 75% to 85% invested within the actively-managed portion of the overall investment portfolio. 15% to 25% in cash or bonds.

Beta Exposure and Portable Alpha Generation

Top Rated Major Market Derivative – NASDAQ 100 (QQQQ)

Top Rated Style-Box Derivative – Morningstar Large Cap Value (JKF)

Top Rated Sector Derivative – iShares Dow Jones Real Estate (IYR)

Today’s Top “Buy” Recommended Stocks
  • CPI Corp. (CPY)
  • NVR Inc. (NVR)
  • Veritas DGC Inc. (VTS)
  • Piper Jaffray Companies (PJC)
  • Goldman Sachs Group Inc. (GS)
  • Sears Holding Corp. (SHLD)
  • American Eagle Outfitters Inc. (AEOS)
  • Sequa Corp. (SQA-A)
  • Libbey Inc. (LBY)
  • NVIDIA Corp. (NVDA)

Sunday, September 24, 2006

AAS Top Ten as of September 15, 2006

The graphs below represent our top rated investments within six different categories as of Friday, September 15, 2006. The analytics we use to rate and select investments are based on a time-weighted alpha rating score that seeks to highlight investments beginning a bullish trend. You can tell from the chart and graphs below that the analytic was correct in each of the six categories of investments with an average gain of 6.28% since the initial “buy” or “short-sale” recommendation. Although the average gain is less than last week’s, the analytic has still done an excellent job selecting investments providing the most alpha.

We’ve color-coded the graphs to represent one of the three “recommendations” our analytic produces for each security. A red line coincides with a “sell” recommendation. A blue line represents a “neutral” or “hold” recommendation and the green line equates to a “buy” recommendation.

The green arrow represents the first date that the security became an “AAS Recommended Buy” after previously being an “AAS Recommended Sell.” For the “Short-Sale” group, the red arrow represents the first date that the security became an “AAS Recommended Sell” after previously being “buy” recommended. Also included are the most recent recommendations of each security.

(Click on the Chart/Graph to magnify)

Friday, September 22, 2006

Bad New Is...Bad News

So we’re obviously at the point when negative economic reports put pressure on the markets. Over the last few months, trying to decipher the market’s reaction to economic stimulus was basically a toss-up. Bad news was good and good news was bad. Not so any more. Investing is tough enough without having to factor in some sort of reverse psychology. As a bull, which I still am despite yesterday and the Philly Fed, I like to see a certain degree of consolidation within a trend. It helps to solidify a base going forward which ultimately is a good thing.

I think it’s safe to say that the Fed won’t be raising rates again this year, which I also believe is already priced into the market. If and when they cut rates isn’t really high on my list of concerns at the moment. What I’m trying to figure out is what’s needed in order to continue the rally that started in late-June. We know what got us here, now it’s time to find out what keeps us on track. My hope, looking at the top rated investments below, is that Tech and Financials do the job.

Short-Term Technical Indicators – Six weakened overnight, with the NYSE Advance / Decline line and the 9-Day Moving Average of the DJIA MACD the only gainers. Three are higher than last week’s levels, six are higher than last month’s, and all eight are higher than last year’s values.

I’m going to move the discussion of new highs and whether or not they’re technically supported to the back burner for the time being. If and when it happens, I’ll make sure to write about it. For the record, I still think we’ll break through the recent highs from early May 2006. As for all-time highs, I see it happening for the DJIA this year, but that’s probably it.

Long-Term Market Model – Bullish since August 23rd.

Investor Sentiment – The indicators I use are actually mixed after yesterday. Those gaining include the VIX, Total Put / Call Ratio and Equity Put / Call Ratio. The VXN and the Index Put / Call Ratio slipped a bit. One of the other indicators I use to establish sentiment is the weekly Trader’s Commitments from the Commodities Futures Trading Commission (CFTC). Last week, the long S&P 500 commercial hedges were 478,138 versus 499,864 for the shorts. It always valuable to know what the institutional investors are doing.

Asset Allocation – 75% to 85% invested within the actively-managed portion of the overall investment portfolio. 15% to 25% in cash or bonds.

Beta Exposure and Portable Alpha Generation

Top Rated Major Market Derivative – Fidelity NASDAQ Composite (ONEQ)

Top Rated Style-Box Derivative – Morningstar Small Cap Core (JKJ)

Top Rated Sector Derivative – iShares Goldman Sachs Software (IGV)

Today’s Top “Buy” Recommended Stocks
  • CPI Corp. (CPY)
  • Piper Jaffray Companies (PJC)
  • Veritas DGC Inc. (VTS)
  • Sequa Corp. (SQA-A)
  • Sears Holding Corp. (SHLD)
  • Goldman Sachs Group Inc. (GS)
Today’s Top “Buy” Recommended ProFund Mutual Funds
  • ProFunds Telecomm Ultra Sector (TCPIX)
  • ProFunds Ultra OTC (UOPIX)
  • ProFunds Technology Ultra Sector (TEPIX)
  • ProFunds Financials Ultra Sector (FNPIX)
  • ProFunds Ultra Bull (ULPIX)

Thursday, September 21, 2006

Manage Your Own Hedge Fund

With all of the coverage lately about Amaranth or MotherRock, I keep waiting for someone in the media to pose the question…why invest in hedge funds? A simple question indeed, but in my opinion it no longer has a simple answer.

Think about the investments hedge funds use to generate alpha: commodities, futures, currencies, options, leverage and shorts. Aren’t these “alternative” investments available to everyone these days in the form of ETF’s and in some cases mutual funds? Don’t they basically achieve the same thing? Isn’t it possible to employ hedge fund strategies within smaller, more liquid portfolios? I think the answer to all three questions is “yes,” and a growing number within the investment industry feel the same.

One of my favorite, newly discovered blogs is All About Alpha, which collects and discusses articles that cover just about every aspect of “alpha.” Alpha Male, the blog publisher, recently included an article titled “Portable Alpha: A Glimpse At the Future” by Milton Ezrati, which basically argues that portable alpha can be generated without having to use hedge funds. That belief, shared by myself of course, is the reason we created Alpha Advisor Service, LLC – to provide investors with a practical approach of creating portable alpha without hedge funds.

You might be asking, so if the tools are the same, isn’t it worth paying a hedge fund manager to do the dirty work? I’m not so sure anymore. To be fair, I have a certain degree of admiration for the Brian Hunter’s of the world. Not only do they possess the intelligence needed to be successful investors, but they have the fortitude (read: guts) to make spectacularly big bets. There are only a handful of investors willing to be levered 5:1 long natural gas. But there’s so much money chasing the returns hedge funds are capable of providing, that often times the managers cross the line between investors and market movers. At that point, very bad things happen for all involved.

Short-Term Technical Indicators – Seven of the short-term, technical indicators strengthened overnight while one remained unchanged. Five indicators are higher than last week’s levels, while all eight are stronger than both last month’s and last year’s values. We’re getting closer to breaking through the recent DJIA and S&P 500 highs of early May 2006. Currently, two of the three indicators would support a new high within the S&P 500 while only one would support a new high within the DJIA.

Long-Term Market Model – Bullish since August 23rd.

Investor Sentiment – There was a significant retreat in the VIX as well as all three Put / Call ratios. The Index Put / Call ratio, which I discussed yesterday, made its way back down to 1.77 from 3.16. The VXN increased moderately however.

Asset Allocation – 75% to 85% invested within the actively-managed portion of the overall investment portfolio. 15% to 25% in cash or bonds.

Beta Exposure and Portable Alpha Generation

Top Rated Major Market Derivative – Russell 2000 (IWM)

Top Rated Style-Box Derivative – Morningstar Small Cap Core (JKJ)

Top Rated Sector Derivative – iShares Goldman Sachs Software (IGV)

Today’s Top “Buy” Recommended Stocks
  • NVR Inc. (NVR)
  • Piper Jaffray Companies (PJC)
  • Veritas DGC Inc. (VTS)
  • Sequa Corp. (SQA-A)
  • Sears Holding Corp. (SHLD)
  • American Eagle Outfitters (AEOS)
Today’s Top “Buy” Recommended Fidelity Select Mutual Funds
  • Fidelity Select Brokerage & Investment (FSLBX)
  • Fidelity Select Software & Computer (FSCSX)
  • Fidelity Select Telecommunications (FSTCX)
  • Fidelity Select Retailing (FSRPX)
  • Fidelity Select Computers (FDCPX)

Wednesday, September 20, 2006

Bears Getting Louder

We’re all expecting no action from the Fed today, but I’m very interested to see how the market reacts to the decision. I’m really hoping that after today those investors sitting on the sidelines will be persuaded to join the bulls and move the markets higher. My technical indicators are weakening, but a solid day will likely return them to last week’s levels. I’m still bullish, but if for some reason we don’t break through the resistance levels and close with new highs within the next week or so, I might adopt a more neutral sentiment perhaps until after the mid-term elections. Keep your fingers crossed!

Short-Term Technical Indicators – On Monday I highlighted the 21 – Day Breadth Indicator as a technical analytic that would support a new DJIA high. That indicator, although continuing to slip, is still in a position to support such a move.

Another analytic I use is the 21 – Day Volume Ratio, which is also designed to support a new high. Due to the volatility experienced over the last few days, this value currently does not support a new DJIA high. However, it’s entirely possible that if we were to see a new high today or later this week, the stimulus used to generate the new high would be enough to push the 21 – Day Volume ratio higher into a supporting position.

(Click on graph to magnify)


Long-Term Market Model – Bullish since August 23rd.

Investor Sentiment – There was dramatic movement in all three Put / Call ratios yesterday, but the Index Put / Call ratio jumped by more than 50%. The current value is now only 0.73 away from its 52-week high of 3.89. Since mid-October of 2003, the Index Put / Call Ratio has crossed above the 3.0 threshold only eight times, with the previous two being 5/24/2006 and 9/26/2005. This elevated value is the result of a higher volume of Puts compared to Calls, which indicates bearish sentiment.

Asset Allocation – 75% to 85% invested within the actively-managed portion of the overall investment portfolio. 15% to 25% in cash or bonds.

Beta Exposure and Portable Alpha Generation

Top Rated Major Market Derivative – Russell 2000 (IWM)

Top Rated Style-Box Derivative – Morningstar Small Cap Core (JKJ)

Top Rated Sector Derivative – iShares Dow Jones U.S. Real Estate (IYR)

Today’s Top “Buy” Recommended Stocks
  • NVR Inc. (NVR)
  • Piper Jaffray Companies (PJC)
  • Veritas DGC Inc. (VTS)
  • Sears Holding Corp. (SHLD)
  • NCI Building Systems Inc. (NCS)
Today’s Top “Buy” Recommended Exchange Traded Funds
  • iShares Cohen & Steers Realty Majors (ICF)
  • iShares MSCI Mexico Index (EWW)
  • iShares Dow Jones U.S. Real Estate (IYR)
  • Vanguard REIT Index (VNQ)
  • Vanguard Telecom Services (VOX)

Tuesday, September 19, 2006

Hedge Funds

The colossal losses triggered by Brian Hunter at Amaranth Advisors is certainly unfortunate, not only for the investors, but for the hedge fund and the industry in general. I’m sympathetic to Brian, in part because he’s a young trader cursed with enormous success immediately followed by unbelievable failure. Can you imagine the emotional roller-coaster he’s been on over the last few weeks? Undoubtedly others deserve a share of the blame, but for the time being he’s the guy credited with losing $5 billion in one week.

I’m hoping that it’s the banks and institutional investors reeling now, and not mom and pop whom un-knowingly have their pensions invested in the fund. If that’s the case, it’s a real shame worthy of oversight. Hedge funds are not bad investments; they’re just simply not for everyone. And every now and then, because managers use sophisticated leverage strategies and get locked into an investment, big time losses are incurred.

Short-Term Technical Indicators – Weakening slightly, but still in position to support new highs in both the Dow Jones Industrial Average and the S&P 500.

Long-Term Market Model – Bullish since August 23rd.

Investor Sentiment – There was a decent pop in the NASDAQ volatility index (VXN) overnight, as well as an increase in all three Put / Call ratios. I think a lot of the institutional investors are covering their shorts in preparation for a rally after the Fed meeting on Wednesday.

Asset Allocation – 75% to 85% invested within the actively-managed portion of the overall investment portfolio. 15% to 25% in cash or bonds.

Beta Exposure and Portable Alpha Generation

Top Rated Major Market Derivative – Fidelity NASDAQ Composite Index (ONEQ)

Top Rated Style-Box Derivative – Morningstar Small Cap Core (JKJ)

Top Rated Sector Derivative – Goldman Sachs iShares Semiconductor (IGW)

Today’s Top “Buy” Recommended Stocks
  • NVR Inc. (NVR)
  • Piper Jaffray Companies (PJC)
  • Veritas DGC Inc. (VTS)
  • NCI Building Systems Inc. (NCS)
  • Sanderson Farms Inc. (SAFM)
Today’s Top “Buy” Recommended Rydex Mutual Funds
  • Rydex Dynamic OTC (RYVYX)
  • Rydex Real Estate (RYHRX)
  • Rydex Dynamic S&P 500 (RYTNX)
  • Rydex Russell 2000 Advantage (RYMKX)
  • Rydex Dynamic Dow (RYCVX)

Monday, September 18, 2006

Broad-Based Trend Developing

Commentary – Looking at our top rated stocks below, I’m encouraged that multiple sectors are represented. This indicates the development of a broad-based trend that I’m expecting will continue assuming no surprises from the Fed. Everything appears to be falling into place in terms of earnings, inflation, oil and sentiment. Keep your fingers crossed and ride the wave as long as you can.

Short-Term Technical Indicators – Six of the eight strengthened after Friday’s close. With all of the talk this week about the potential for a new all-time high for the Dow Jones Industrial Average, I’m paying special attention to three indicators designed to support or refute new highs. Of those three, only one strengthened after Friday, the On-Balance Volume % indicator. However, despite both the 21-Day Breath and 21-Day Volume Ratio indicators slipping slightly, they are both in position, at least as of this morning, to support a new DJIA high.

(Click on Graph to Magnify)


Long-Term Market Model –
Bullish since August 23rd.

Investor Sentiment – Market volatility jumped slightly on Friday, with both the VIX and VXN higher than Thursday’s values. There was also a modest increase in the Index Put / Call Ratio. However, all five sentiment indicators I use are much closer to their 52-Week low’s than they are to their respective highs. Sentiment is bullish throughout the market, with both private and professional investors expecting another solid week for stocks fueled by encouraging economic reports.

Asset Allocation – 75% to 85% invested within the actively-managed portion of the overall investment portfolio. 15% to 25% in cash or bonds.

Beta Exposure and Portable Alpha Generation

Top Rated Major Market Derivative – Fidelity NASDAQ Composite Index (ONEQ)

Top Rated Style-Box Derivative – Morningstar Small Cap Core (JKJ)

Top Rated Sector Derivative – Dow Jones iShares Real Estate (IYR)

Today’s Top “Buy” Recommended Stocks
  • NVR Inc. (NVR)
  • Piper Jaffray Companies (PJC)
  • Veritas DGC Inc. (VTS)
  • Sequa Corp. (SQA-A)
  • NCI Building Systems Inc. (NCS)
  • Cooper Companies Inc. (COO)
  • Valmont Industries Inc. (VMI)
  • Apple Computer Inc. (AAPL)
  • Goldman Sachs Group Inc. (GS)
  • Sanderson Farms Inc. (SAFM)

Sunday, September 17, 2006

AAS Top Ten as of September 8, 2006

The graphs below represent our top rated investments within six different categories as of Friday, September 8, 2006. The analytics we use to rate and select investments are based on a time-weighted alpha rating score that seeks to highlight investments beginning a bullish trend. You can tell from the chart and graphs below that the analytic was correct in each of the six categories of investments with an average gain of 15.61% since the initial “buy” or “short-sale” recommendation.

The green arrow represents the first date that the security became an “AAS Recommended Buy” after previously being an “AAS Recommended Sell.” For the “Short-Sale” group, the red arrow represents the first date that the security became an “AAS Recommended Sell” after previously being “buy” recommended. Also included are the most recent recommendations of each security.

(Click on the picture for a bigger preview)


Friday, September 15, 2006

ProShares

Commentary – You may have heard that ProShares, a subsidiary of ProFund Distributors Inc., petitioned the SEC yesterday for 66 new ETF’s. I read about it first from Roger’s blog, who found it on Seeking Alpha which was linked to IndexUniverse. Witness the all powerful blog in action.

Aside from the initial surprise of so many new ETF’s at one time, (seriously - 66?!?), I’m actually quite excited about the possibilities. Our management company has a pretty good relationship with both ProFunds and Rydex, and we’ve grown very comfortable with their respective fund families. In fact, they’re the only fund companies we use. They cater, in my opinion, to active management strategies and those investors seeking portable alpha.

ProShares is trying to bring leveraged long and short ETF’s to the table, both within index and sector investments. Those investors who avoid using inverse or leveraged funds are really doing themselves a disservice. There are a lot of ways to outperform the market, some easier than others, but investing in an inverse or leveraged fund and actively managing it when the market turns bearish is one of the easiest ways I know of. By the way, there’s a huge difference between investing in an inverse fund and “shorting,” which basically involves borrowing money. We don’t short stocks in our managed accounts nor do we recommend it to our subscribers, but we’ll definitely use inverse funds.

I’m not sure how these new ETF’s will perform once released. But based on our experience with ProFunds, I imagine they will quickly become very powerful and popular investment tools. We’ll probably wait until the summer of 2007 before we incorporate them into our strategies, mostly because it looks like the public offering will be 75 days after the filing and we need a minimum of six months of historical data to back-test the funds inside our analytics.

Short-Term Technical Indicators – Only three strengthened overnight: the DJIA MACD and its 9-Day MA and the S&P 500 15-Day Stochastic. It looks like today will be good for stocks, at least based on the futures.

Long-Term Market Model – Bullish since August 23rd.

Investor Sentiment – The VIX increased slightly but the VXN eased a bit. All three Put / Call ratios jumped modestly in response to yesterday’s economic reports.

Asset Allocation – 75% to 85% invested within the actively-managed portion of the overall investment portfolio. 15% to 25% in cash or bonds.

Beta Exposure and Portable Alpha Generation

Top Rated Major Market Derivative – Fidelity NASDAQ Composite Index (ONEQ)

Top Rated Style-Box Derivative – Morningstar Small Cap Core (JKJ)

Top Rated Sector Derivative – Dow Jones iShares Real Estate (IYR)

Today’s Top “Buy” Recommended Stocks
  • NVR Inc. (NVR)
  • Piper Jaffray Companies (PJC)
  • Veritas DGC Inc. (VTS)
  • Sequa Corp. (SQA-A)
  • Lehman Brothers Holdings Inc. (LEH)
Today’s Top “Buy” Recommended ProFund Mutual Funds
  • ProFunds Internet Ultra Sector (INPIX)
  • ProFund Real Estate Ultra Sector (REPIX)
  • ProFunds Ultra OTC (UOPIX)
  • ProFunds Telecom Ultra Sector (TCPIX)
  • ProFunds Technology Ultra Sector (TEPIX)