Portable Alpha Daily

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Monday, September 25, 2006

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)


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