Portable Alpha Daily

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Tuesday, October 03, 2006

European Alpha

Financial Services (IYG) has taken over the top spot as our highest rated sector derivative for alpha generation. We recommended a “buy” for IYG on September 12th and continue to do so. Unfortunately, as more and more investors shift capital from small caps to large caps, the potential to generate alpha within financials and financial services wanes. Why? Because a large percentage of the large cap benchmarks constitute financials, and when capital inflow’s increase, so too does the value of the index.

In addition to financials, which I still like, international investments are again becoming highly rated in terms of alpha generation. Three of the top four ETF investments this morning are European funds. These include the iShares MSCI Spain Index (EWP), the iShares MSCI EMU Index (EZU) and the iShares MSCI Netherlands Index (EWN). I wouldn’t allocate new capital into these vehicles yet, but it’s certainly something to watch over the next few days.

The one-page handouts for the five model portfolios have been updated through September. The rolling performance of these portfolios is listed in the table to the right, and the handouts can be viewed by clicking on the portfolio name. These model portfolios are designed for those investors seeking assistance with the “alpha” component of a portable alpha strategy. For twice-weekly access to these model portfolios as well as our entire portable alpha analysis without having to provide credit card information, click here. Within one day you’ll receive an email from AAS providing a User ID and Password which will be valid for 30-Days.

Short-Term Technical Indicators – All eight of the short-term, technical indicators weakened overnight, continuing their recent trend. The NYSE Advance / Decline remains below 1.0, which is a bearish indication. There was a pretty substantial shift downwards in the Dow Jones Industrial Average’s 21-Day Breadth and Volume Ratio indicators, another short-term bearish indication. I look at the 15-Day Stochastic indicator for three indexes, the DJIA, the S&P 500 and the NASDAQ 100. The current values for each index are 88.64, 87.20, and 75.88. Short-term sell recommendations are supported when the value of this indicator moves from above 80 to below 80, as it has with the NASDAQ 100.

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

Investor Sentiment – The VIX and VXN as well as all three Put / Call ratios edged up yesterday. The VXN, increased significantly from a value of 17.68 to 19.44. Nevertheless, this value remains in-between it’s 52-week High and Low and shouldn’t cause too much concern. Investors should expect elevated volatility much like yesterdays for the remainder of the week as Wall Street jockeys between the bulls and the bears going into earning season

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 – S&P 100 (OEF)

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

Top Rated Sector Derivative – iShares Dow Jones U.S. Financial Services (IYG)

Today’s Top “Buy” Recommended Stocks
  • CPI Corp. (CPY)
  • OM Group Inc. (OMG)
  • Gymboree Corp. (GYMB)
  • Goldman Sachs Group Inc. (GS)
  • American Eagle Outfitters Inc. (AEOS)
Today’s Top “Buy” Recommended Rydex Mutual Funds


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