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Tuesday, September 05, 2006

The Week Ahead - Sep. 5, 2006

Although shortened by Monday’s holiday, this week could prove to be an important indication of investor sentiment and as such a glimpse into what could be expected for the near-term and possibly long-term markets. Institutional investors returning from vacation will have several days to digest and react to last weeks slew of economic reports and set the tone for trading.

I am concerned that everyone seems to be expecting the same thing this week - an influx of volume further facilitating the short-term trend that’s been developing over the last few weeks. I know that there is a significant percentage of Bears out there doubting the credibility of the recent trend, but it seems, at least from my point of view, that they’re muted at the moment by the Bulls, which is something I’m not particularly excited about. This doesn’t change my bullish sentiment, but it’s something worth considering throughout the week.

Only five of the eight short-term, technical indicators strengthened after Friday’s session. The NYSE Advance / Decline Line and the S&P 500 On-Balance Volume Percentage declined and the DJIA 15-Day Stochastic did not change. However, seven remain higher than last week’s levels, and eight are again higher than both last month’s and last year’s reading. In terms of volatility, I’m seeing declines in the Market Volatility Index (VIX) and the NASDAQ Volatility Index (VXN) but increases in two of the three Put / Call ratios.

The long-term market model, bullish since August 23rd, continues to strengthen, and as such I’ll remain in the bullish camp until it reverses. We selected five additional companies on Friday for the Model Stock Portfolio, increasing the allocation to nearly 75% equities and 25% cash. Additionally, all four Model Fund Portfolios are 100% invested. Performance of these model portfolios is included in the table to the right. I’m recommending both to our newsletter subscribers and the blog viewers the same allocation for the actively managed portion of their investment portfolio.

I pointed out on Thursday that the majority of the markets that shifted to a “buy” recommendation last week were newly trending markets with relatively weak rating scores, and as such investors shouldn’t act on the data just yet. Hopefully you heeded that advice, as it appears that last week’s shift upward was significantly impacted by short-term volatility because the analysis has receded from ten to four “buy” recommended Major Market ETF derivatives. However, the other ten major markets we analyze are all “neutral” rated and could be upgraded again if the current trend continues.

The top four market ETF derivatives that investors should look to for beta exposure are the NYSE 100 (NYC), the S&P 100 (OEF), the Dow Jones Industrials Diamond Trust (DIA) and the Fidelity NASDAQ Composite (ONEQ).

Large Cap Value (JKF) and Small Cap Core (JKJ) remain “buy” recommended style-box investments. Real Estate (IYR), Utilities (IDU), Technology (IYW), Software (IGV), Semiconductors (IGW), Healthcare (IYH), Telecommunication (IYZ), and Non-Cyclical (IYK) are “buy” recommended sectors while Energy (IYE) and Natural Resources (IGE) remain “sell” recommended.

I certainly continue to recommend that investors take this time to establish their investment strategy for the remainder of the year. For those wanting to generate alpha by actively managing a portion of their portfolios, look to one or possibly two major markets for beta exposure. The remainder of the actively managed component should be divided up into style-box, sector and individual security investments.

Tomorrow’s blog will focus on specific Large Cap Value and Small Cap Core investments, while Thursday and Friday will highlight specific sectors. Have a great day!

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