Portable Alpha Daily

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Wednesday, January 17, 2007

Market Model Improving

I mentioned to our subscribers in yesterday’s newsletter that it appeared our long-term market model might revert to a bullish status sometime this week. If you remember, the model turned bearish back on December 8th, primarily because one of the components of the model, a dominance ratio between NASDAQ and NYSE securities, shifted in favor of NYSE issues. For bullish trends, we prefer to see NASDAQ issues as dominant.

As of yesterday’s close, the ratio is now again in favor of NASDAQ securities. Unfortunately, other components of the long-term model are still bearish, which are in turn preventing the overall model from being categorized as bullish. There needs to be improvement in the interest rate environment and/or further solidification in several NASDAQ advance-decline ratios before the entire model is upgraded. As such, the likelihood of our model turning bullish this week is remote, although it’s certainly feasible sometime this month.

Fortunately when our market model shifted in early-December we made the decision not to overhaul the AAS Model Portfolios in favor of inverse positions. We did take caution by raising cash levels, but we believed that the technicals in the market were breaking down and defensive measures were needed. In hindsight I still believe that the markets may have been headed for a correction. What I didn’t predict was the precipitous drop in crude, which I believe served to stabilize the weakening markets until earnings season started, in effect preventing a substantial reversion of the market. With earnings season underway and positive results being reported thus far, I’m not anticipating a correction unless earnings sour, or crud oil prices increase substantially, or inflation worsens.

With that being said we will likely maintain a 25% cash allocation in the model portfolios until our long-term market model turns bullish. Remember these portfolios are designed as the alpha component of a portable alpha portfolio. The idea is to use leveraged ETF’s or mutual funds to provide broad-based market exposure (beta) and then overlay the returns from an alpha-generating portfolio. For further information on how to do this, click here and here.

Although I’m still concerned about the market and the investing environment, I’m encouraged by the numbers of “New Buy’s” being generated by our analytic. Last week, the number of buy recommended securities was less than 200 (9%), which is a level not seen since the middle of July. Currently, about 15% of the securities have buy recommendations, which although not substantial is still an improvement.

Short-Term Technical Indicators

Investor Sentiment

Long-Term Market Model – Bearish since December 8th.

Asset Allocation – AAS Model Portfolios are between 56.25% and 75% long currently.

Beta Exposure and Portable Alpha Generation
Date = Date of AAS “Buy” or “Short/Sell” Recommendation

Top Rated Major Market Derivative – No buy recommended major market investments

Top Rated Style-Box Derivative – No buy recommended style-box investments

Top Rated Sector Derivative – iShares Dow Jones U.S. Financial (IYF 1/16/07)

Today’s Top “Buy” Recommended Stocks

NBTY, Inc. (NTY 12/5/06)

Volt Information Sciences, Inc. (VOL 11/6/06)

CarMax Inc. (KMX 7/25/06)

Martin Marietta Materials, Inc. (MLM 11/6/06)

Savient Pharmaceuticals Inc. (SVNT N/A)

The Goodyear Tire & Rubber Co. (GT 8/23/06)

Precision Castparts Corp. (PCP 9/20/06)

Brown Shoe Company Inc. (BWS 9/12/06)

Jo-Ann Stores Inc. (JAS 9/1/06)

Public Storage Inc. (PSA 12/13/06)

Today’s Top “Sell” Recommended Stocks

CONSOL Energy Inc. (CNX 12/15/06)

Brightpoint Inc. (CELL 9/19/06)

Intuitive Surgical Inc. (ISRG 12/19/06)

Advanced Micro Devices Inc. (AMD 9/27/06)

Plexus Corp. (PLXS 12/29/07)


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