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Thursday, February 01, 2007

Good Morning

Better-than-expected Q4 GDP data and a notably dovish Fed pushed the major averages higher on the last trading day of the month. The Dow reached a record intraday high, ending the month up 1.3 percent and extending the streak of monthly gains to seven, the longest such streak in about 12 years. Meanwhile, the S&P 500 gained 1.4 percent for the month and extended its rally for the eighth consecutive month.

The Dow Jones Industrial Average added 98.38 points, or 0.79 percent, to close at 12,621.69. The S&P 500 Index jumped 9.42 points, or 0.66 percent, to finish at 1,438.24 while the NASDAQ Composite Index advanced 15.29 points, or 0.62 percent, to close at 2,463.93.

Trading volume was moderate on the Big Board, with about 1.73 billion shares changing hands and advancers outnumbering decliners by about 11 to 5. The NASDAQ saw elevated volume with about 2.34 billion shares traded, above last year's daily average of 2.02 billion, and advancers outnumber decliners by about 17 to 13.

Robust spending and slowing inflation, which offset weakness in the housing market, resulted in higher-than-expected economic growth in the fourth quarter. Fourth-quarter GDP grew at an annual rate of 3.5 percent, exceeding economists' forecast for 3.0 percent, and above third-quarter growth at an annual rate of 2.0 percent.

Additionally, the Fed unanimously voted to maintain the 5.25% rate for overnight lending and noted that inflationary risks had improved. Although the financial markets increased bets that the Fed will cut rates later in the year, policy makers indicated they will remain vigilant against inflation and notably avoided any mention of a rate cut. Core inflation increased by 2.1 percent, slower than Q3 but still marginally above the Fed’s “comfort zone.” Improvements in hiring as well as consumer sentiment and demand for luxury goods appear to confirm the view that the weakness in the housing sector would not transverse into the broad economy.

U.S. government bond prices rallied after the Fed’s statement on Wednesday. The benchmark 10-year Note rose 14/32 in price for a yield of 4.82 percent. Two-year Notes, which correlate closely to expectations for Fed interest rate moves, rose 3/32 in price to yield 4.93 percent. Three-year Notes were up 4/32 in price, yielding 4.86 percent while the 30-year Bond rose 29/32 in price for a yield of 4.92 percent.

The global markets responded in kind to the U.S. economy. Japan's Nikkei Average rose 0.78 percent on Thursday to close at its highest in nearly 10 months while the broader TOPIX Index was up 0.97 percent at 1,738.58. Currently, the FTSEurofirst 300 index, Paris's CAC 40, Frankfurt's DAX and Zurich's SMI are all up about 1 percent, while London's FTSE 100 is up nearly 1.5 percent.

In currency trading, the dollar fell against both the Euro and the Yen. The Euro settled at $1.3033, up 0.5 percent in the session while the dollar fell 0.8 percent at 120.66 Yen.

Our long-term market model remains bearish as of December 8th. The total universe of stocks, ETF and funds which we review on a daily basis is 1,887. Of those reviewed, 334 are rated "Buy," 453 are rated "Sell" and 1100 "Neutral." Our model portfolios are currently allocated between 56.25% and 75% long. We’re getting more comfortable with the dynamics of the market but don’t feel the need to adjust the portfolio allocation recommendations just yet.

Again, there are no “buy” recommended major market or style-box derivatives this morning. Telecommunication (IYZ), Retail (RTH) and Financials (IYF) the only “buy” recommended sectors.

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. Telecom (IYZ 1/26/07)

Today’s Top “Buy” Recommended Stocks

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

CPI Corp. (CPY 1/23/07)

Rock-Tenn Co. (RKT 4/27/06)

Navistar International Corp. (NAV 9/12/06)

MEMC Electronic Materials, Inc (WFR 1/8/07)

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

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

Energizer Holdings Inc. (ENR 1/26/07)

Carpenter Technology Corp. (CRS 1/31/07)

Savient Pharmaceuticals Inc. (SVNT 8/9/06)

Today’s Top “Sell” Recommended Stocks

Plexus Corp. (PLXS 12/29/06)

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

Whole Foods Market Inc. (WFMI 11/2/06)

Rogers Corp. (ROG 12/6/06)

Brightpoint Inc. (CELL 9/19/06)

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