Portable Alpha Daily

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Thursday, November 02, 2006

Broad-Based Shift for Alpha Developing

The market sell-off yesterday was undoubtedly facilitated by the year-end closing for the majority of mutual funds which occurs on 10/31/2006. After their books were closed for the year, the managers sold out of their most profitable and volatile positions which helped bring the market down.

Of the 1,716 securities we review daily for alpha, 411 are rated "Buy," 713 are rated "Sell" and 592 "Neutral." This is the lowest level of “buy” recommended securities since August 3, 2006.

Weakness in yesterday’s session coupled with the last few days of market declines is evident in our alpha analysis. There are only four “buy” recommended major market derivatives with the S&P 100 (OEF 8/4/06) the highest-rated. We’re seeing a shift from small cap indexes back to the large and mega caps. This could be a short-term transition in response to a much needed consolidation period, but nevertheless our analytic is recommending selling out of small cap indexes used previously for beta exposure.

We’re seeing the same selling pressure with regard to style-box investments. Small Cap Core (JKJ) used to be our highest rated derivative, but it is now a “sell” recommended security, replaced by Mid Cap Core (JKG) and Large Cap Core (JKD).

A noticeable shift in our sector analysis has also transpired as a result of the recent weakness of the markets. Although Real Estate (IYR) remains by far our strongest rated sector for alpha generation, only four other sectors are “buy” recommended this morning. Biotechnology (IBB) is our second highest-rated sector and actually the best performer over the last one week.

In general, the markets are very unpredictable at the moment and it’s increasingly difficult to locate areas of alpha generation. We don’t necessarily expect a bearish trend to develop, but we certainly recommend caution and patience before allocating new money. Once the markets digest the recent weaker-than-expected economic reports and consolidate the gains of the past few months, we think a stable base will develop which will support a continuation of the trend for the rest of year.

Short-Term Technical Indicators – One of the data vendors we use is still having problems this morning, so I’m unable to update my short-term technical indicators.

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

Investor Sentiment – The VIX, VXN and Equity Put / Call Ratio edged higher from Tuesday’s levels as the bears begin to put up a fight.

Asset Allocation – 100% invested within the actively-managed, alpha producing portion of the overall investment portfolio. We’re by no means resistant to any change in allocation percentage, especially if the markets experience elevated volatility going forward. But it would take further broad-based declines for our model to reduce its allocation recommendation.

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

Top Rated Major Market Derivative – iShares S&P 100 (OEF 8/4/06)

Top Rated Style-Box Derivative – iShares Morningstar Mid Cap Core (JKG 9/12/06)

Top Rated Sector Derivative – iShares Dow Jones Real Estate (IYR 6/30/06)

Today’s Top “Buy” Recommended Stocks
  • OM Group Inc. (OMG 8/11/06)
  • RTI International Metals Inc. (RTI 10/11/06)
  • Allegheny Technologies Inc. (ATI 10/5/06)
  • Harman International Industries Inc. (HAR 10/9/06)
  • Veritas DGC Inc. (VTS 7/28/06)
  • F5 Networks Inc. (FFIV 9/20/06)
  • Sears Holdings Corp. (SHLD 9/19/06)
  • Chaparral Steel Company (CHAP 11/1/06)
  • Sequa Corp. (SQA-A 10/5/06)
  • Goldman Sachs Group Inc. (GS 9/12/06)
Today’s Top “Sell” Recommended Stocks
  • Apollo Group Inc. (APOL 10/13/06)
  • Express Scripts Inc. (ESRX 9/22/06)
  • Carbo Ceramics Inc. (CRR 2/7/06)
  • Omnicare Inc. (OCR 5/10/06)
  • Universal Forest Products Inc. (UFPI 5/24/06)
Today’s Top “Buy’ Recommended Fidelity Select Mutual Funds
  • Software & Computer (FSCSX 7/27/06)
  • Biotechnology (FBIOX 10/5/06)
  • Multimedia (FBMPX 10/11/06)
  • Leisure (FDLSX 9/12/06)
  • Automotive (FSAVX 9/28/06)


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