Portable Alpha Daily

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Monday, September 11, 2006

The Week Ahead - Sep. 11, 2006

Commentary – Inflation is at the forefront this week yet again as investors try to get a better understanding of the economic outlook over the intermediate term. Wall Street, concerned that inflation isn’t slowing at the same rate as economic growth, will unfortunately have to wait until Friday for the more significant economic reports to be released, which will hopefully alleviate some of the uncertainty. In the meantime, I’m expecting the markets to be somewhat range bound with volume on par with last week.

In terms of a portable alpha investment strategy this week, active management will be more difficult than normal until we get a better understanding of market direction and sentiment. Although our analytics are producing a decent number of “buy” recommendations, I’m not comfortable narrowing down investments within a specific sector(s). Until then, I’m recommending that investors practice patience and minimize their active management, unless of course specific sell-loss rules are triggered, at which point I’d allocate into cash.

Short-Term Technical Indicators – Mixed, with four of the eight strengthening after Friday’s session. The NYSE Advance / Decline Line, the DJIA MACD and the 9-Day MA of the MACD as well as the 15-Day Stochastic are all lower this morning. Only three indicators are higher than levels from one week ago. However, seven are higher than one month ago and six are higher than one year ago. The markets have weakened despite Friday’s session, and are probably not conducive to active management, at least not this week. Once we get passed the 9/11 anniversary and several significant economic reports later this week, sentiment should be more decipherable.

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

Investor Sentiment – VIX and VXN levels decreased slightly in response to Friday’s gains, but both are still higher than levels one week ago. The Total and Equity Put / Call ratios gained a bit, while the Index Put / Call ratio retreated. All five indicators are basically right in-between their 52-week highs and lows. Sentiment looks extremely bearish this morning, with futures significantly lower than their fair value. I’m hoping this is not fundamentally driven, which could translate to losses throughout the week.

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 – Dow Jones Industrials Diamond Trust (DIA)

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

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

Top Rated “Buy” Recommended Investments for Active Management
  • Veritas DGC Inc. (VTS)
  • Chaparrel Steel Company (CHAP)
  • OM Group Inc. (OMG)
  • Sequa Corp. (SQA-A)
  • Cooper Companies Inc. (COO)
  • Apple Computer Inc. (AAPL)
  • Piper Jaffray Companies (PJC)
  • American Eagle Outfitters Inc. (AEOS)
  • Phelps Dodge Corp. (PD)
  • SanDisk Corp. (SNDK)


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