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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)

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