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Monday, November 20, 2006

Alpha in Transports Revisited

I mentioned in Friday’s post that I’d like to see new leadership develop to help propel the rally through the end of the year. It’s difficult for me to pinpoint any one sector as being in position to lead the market. Biotechnology (IBB 10/6/06) has been one of our highest-rated sectors for the last six weeks, but I’m concerned that it might not have the muscle to lead by itself.

Three sectors that I listed as potential leaders were Transports (IYT 11/10/06), Energy (IYE) and Natural Resources (IGE). I’ve discussed alpha in Transports twice over the last month and a half, once on October 6th and again on October 23rd, listing among others Alaska Air Group (ALK 11/13/06) and JetBlue Airways Corp. (JBLU 10/17/06) as “buy” recommended companies. JBLU, as you know, is doing very well, up over 30% since I published the recommendation and nearly 37% since our “buy” recommendation.

We analyze roughly thirty-five transportation companies for alpha each day. As of this morning, twelve are “buy” recommended, fifteen are “neutral” and eight are “short/sell” recommended. Our highest-rated stocks are PACCAR Inc. (PCAR 11/10/06), AirTran Holdings Inc. (AAI 11/15/06) and Trinity Industries Inc. (TRN 10/31/06).

Short-Term Technical Indicators – The 15-Day Relative Strength of the DJIA continued to improve on Friday as did the MACD.

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

Investor Sentiment – VIX closed at another 52-week low on Friday with a value of 10.05. A low level of volatility coupled with an increase in the percentage of bullish advisors indicates that investor sentiment is extremely bullish. Used as a contrarian indicator, such optimism and complacency should be viewed as bearish.

One of the guests this morning on CNBC made a very interesting comment suggesting that investor sentiment surveys might now be “contrarian-contrarian indicators.” Investor reverse-psychology, one would think, is hard to quantify and interpret, which is why we don’t over-weigh these surveys in our analysis.

I’m more interested in whether or not institutional investors are “putting their money where their mouths are.” I prefer to use more quantifiable measures such as traditional put/call ratios and volatility indexes as well as commercial hedges when measuring sentiment.

Asset Allocation – 100% invested within the actively-managed, alpha producing portion of the overall portable alpha portfolio.

Beta Exposure and Portable Alpha Generation
Date = Date of AAS “Buy” Recommendation

Top Rated Major Market Derivative – Fidelity NASDAQ Composite (ONEQ 8/30/06)

Top Rated Style-Box Derivative – iShares Morningstar Small Cap Core (JKJ 11/6/06)

Top Rated Sector Derivative – iShares NASDAQ Biotechnology (IBB 10/6/06)

Today’s Top “Buy” Recommended Stocks
  1. RTI International Metals Inc. (RTI 10/11/06)
  2. Daktronics Inc. (DAKT 10/31/06)
  3. F5 Networks Inc. (FFIV 9/20/06)
  4. Chaparral Steel Co. (CHAP 11/1/06)
  5. Goldman Sachs Group Inc. (GS 9/12/06)
  6. Alleghany Technologies Inc. (ATI 10/5/06)
  7. Amazon.com Inc. (AMZN 10/9/06)
  8. Cephalon Inc. (CEPH 10/24/06)
  9. Harman International Ind. Inc. (HAR 10/9/06)
  10. Volt Information Sciences Inc. (VOL 11/6/06)
Today’s Top “Sell” Recommended Stocks (Date of “Short/Sell” Recommendation)
  1. Hansen Natural Corp. (HANS 8/4/06)
  2. Whole Foods Market Inc. (WFMI 11/2/2006)
  3. The Washington Post Co. (WPO 7/5/06)
  4. Intuitive Surgical Inc. (ISRG 10/27/06)
  5. Carpenter Technology Corp. (CRS 10/26/06)

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