Portable Alpha Daily

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Tuesday, November 07, 2006

The Dreaded Reversal

Broad-based weakness last week manifested itself into our alpha analytic through Friday’s close and we saw not only an elevated number of “short/sell” recommended securities, but a lower number of “buy” recommended investments. In fact, I wrote about “deterioration” in our analytic just yesterday, noting that Russell 2000 (IWM 11/6/06) derivative was a “short/sell” recommended investment for beta exposure.

Any technical or quant investor/trader can attest that short-term reversals in their model or analytic do in fact occur, especially in range-bound markets. It’s virtually impossible to prevent them while maintaining a systemic, disciplined investment strategy. Although we do our best to minimize the occurrence, it should be understood that any investor utilizing an active investment strategy will experience an occasional reversal.

With that being said, I’d like to note a reversal that occurred after Monday’s close with regard to the Russell 2000 (IWM 11/6/06) derivative. Looking at today’s analysis, I noticed that the Russell 2000 returned to the top tier of our analysis as a "buy" recommended investment for beta exposure and that several small-cap style box derivatives are again generating alpha. In my defense I noted that I didn’t feel that yesterday’s “short/sell” recommendation would last long, perhaps a week or two.

Personally I’d still be extremely cautious investing in the Russell 2000 for beta or small-cap investments for alpha. I’d like to see a bit more stability in the market, especially after the elections. It's hard to determine if the recent gains are extensions of the three-month rally or reactions to political news etc. Even with yesterday’s strong session, our long-term market model continues to creep towards bearish territory which makes me very reluctant to allocate new money into anything at the moment.

Our approach to portable alpha can be summarized in the six steps listed below. This might make more sense to those investors curious about what Alpha Advisor Service, LLC does and what our subscribers are provided with.
  1. Long-Term Market Model
    • Determines a bullish or bearish portfolio
    • Determines allocation percentages for alpha generating investments
  2. Short-Term Technical and Sentiment Indicators
    • Used to confirm long-term model and allocation percentages
  3. Major U.S. Market Analysis
    • Determine overall market strength and direction
    • Select investments for “beta”
  4. Style-Box Investment Analysis
    • Used to narrow down investments for either “alpha” or “beta”
  5. Sector Analysis
    • Used to narrow down investments for “alpha”
  6. Individual Security Analysis
    • Used to select investments for “alpha”
Long-Term Market Model – Bullish since August 23rd.

Investor Sentiment – The VIX was unchanged from Friday’s close, but the VXN edged higher. All three Put/Call Ratios closed lower and are trading below last week’s levels.

Asset Allocation – 100% invested within the actively-managed, alpha producing portion of the overall investment 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
  • 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)
  • Goldman Sachs Group Inc. (GS 9/12/06)
  • F5 Networks Inc. (FFIV 9/20/06)
  • Centene Corp. (CNC 10/20/06)
  • Gymboree Corp. (GYMB 9/28/06)
  • Group 1 Automotive Inc. (GPI 10/25/06)
  • Sequa Corp. (SQA-A 10/5/06)
Today’s Top “Sell” Recommended Stocks
  • Apollo Group Inc. (APOL 10/13/06)
  • Whole Foods Market Inc. (WFMI 11/2/2006)
  • Express Scripts Inc. (ESRX 9/22/06)
  • Red Robin Gourmet Burgers Inc. (RRGB 11/2/06)
  • Chico’s FAS Inc. (CHS 11/1/06)
Today’s Top “Buy” Recommended Rydex Mutual Funds
  • Dynamic OTC (RYVYX 8/16/06)
  • Dynamic S&P 500 (RYTNX 8/3/06)
  • Internet (RYIIX 8/31/06)
  • Dynamic Dow (RYCVX 8/11/06)
  • Leisure (RYLIX 9/11/06)


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