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Thursday, September 14, 2006

Alpha in Homebuilders?

Commentary – A very interesting development that’s taken place over the last few weeks is the shift from a “short-sale" to a "neutral" and now to a “buy” recommendation for NVR Inc. (NVR). As some of you know, NVR has been one of our weakest rated stocks since April 27th, which is the date our analytics downgraded it to a “short-sale.” From April 27th through July 17th the stock lost over 46% of its value. However, since July 17th NVR is up over 35%, an astounding number considering it’s not only a homebuilder, but that it’s doubled the gains of most of its competitors.

There’s a lot of discussion about whether or not it’s time to invest in homebuilders, which is an issue I’m not yet comfortable with. I wouldn’t argue against a small speculative position, but I still think there are better opportunities for alpha generation in other sectors. But I can’t argue with the performance that most of the stocks have shown over the last few weeks. It’s an interesting development that I’ll certainly pay attention to over the next few days and weeks.

Short-Term Technical Indicators – There’s been a big jump over the last couple days in the S&P 500’s On-Balance Volume % indicator, which I use to support new highs in the market. Basically, if there’s a new high not supported by a new OBV high, I view that as short-term bearish. If the S&P 500 continues its bullish trend and closes higher than the 1325.76 established on May 5th, and the OBV continues to climb, I might adjust our asset allocation recommendation to be further invested sometime next week.


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

Investor Sentiment – Both of the volatility indexes and all three Put / Call ratios declined again overnight, now significantly lower than last weeks levels.

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 Semiconductor (IGW)

Today’s Top “Buy” Recommended Stocks
  • NVR Inc. (NVR)
  • Veritas DGC Inc. (VTS)
  • Piper Jaffray Companies (PJC)
  • Sequa Corp. (SQA-A)
  • Cooper Companies Inc. (COO)
Today’s Top “Buy” Recommended Fidelity Select Funds
  • Fidelity Select Brokerage & Investment (FSLBX)
  • Fidelity Select Software & Computers (FSCSX)
  • Fidelity Select Telecommunications (FSTCX)
  • Fidelity Select Technology (FSPTX)
  • Fidelity Select Computers (FDCPX)

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