Portable Alpha Daily

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Tuesday, February 27, 2007

Weakness in Asian Markets

Bulls hoping to start the week off on a good foot were disappointed Monday as last week’s broad-market declines carried over into yesterday’s session. Concerns of a pending recession off-set significant M&A activity involving a private equity buyout of TXU Corp. (TXU) and potential buyout of Dow Chemical (DOW). With sour economic reports expected throughout the week, including a downward GDP revision, investors are beginning the feel the wheels coming off the rally that started back in July 2006. Recent spikes in the Put/Call ratios illustrate institutional investors’ concern that a market correction is fast approaching.

The Dow Jones industrial average fell 15.22, or 0.12 percent, to 12,632.26. The S&P 500 index was down 1.82, or 0.13 percent, at 1,449.37, the NASDAQ composite index fell 10.58, or 0.42 percent, to 2,504.52 and the Russell 2000 index of fell 2.95, or 0.36 percent, to 823.69.

Volume was moderate on the NYSE, where about 1.56 billion shares changed hands, below last year's estimated daily average of 1.84 billion shares. Decliners registered at 1,657 while advancers were slightly below at 1,650. On the NASDAQ, about 1.94 billion shares traded, below last year's daily average of 2.02 billion with an advance-decline ratio of three to two.

Bonds prices continued to improve after last week’s sell off, spurred by a warning from former Fed Chairman Greenspan about the possibility of a recession by year’s end. The yield on the benchmark 10-year Treasury note fell to 4.63 percent from 4.68 percent late Friday.

The dollar lost traction against the other major currencies. The Euro bought $1.3185, the Pound rose to $1.9644 from $1.9637 and the dollar bought 120.57 Yen.

A weakening dollar and geopolitical tensions led gold to its highest level in nine months on Monday. Other central banks expecting to diversify reserves out of the U.S dollar and into other currencies also fueled the rally. Gold for April delivery on the COMEX settled up $3.10 at $689.80 an ounce.

A strong winter storm traversing across the U.S led oil prices higher and spurred expectations of increased heating oil demand. Light sweet crude rose 25 cents to $61.39 on the NYMEX. April Brent crude added 45 cents to finish at $61.33 a barrel. Heating oil prices settled at $1.7562 a gallon while natural gas futures dropped 20.8 cents to $7.547 per 1,000 cubic feet.

Overseas, Japan's Nikkei stock average closed up 0.15 percent on Monday. However, Tuesday’s session saw the Shanghai Composite Index fall 8.8 percent to close at 2.771.79 after investors sold off stocks to lock in recent profits. The massive decline will likely carry over into European and U.S. markets today.

In Europe, the FTSEurofirst 300 index rose 0.4 percent to end at 1,550.4, its highest closing level since December 2000. London's FTSE 100 index added 0.5 percent, Paris's CAC 40 gained 0.8 percent, and Frankfurt's DAX was 0.5 percent higher.

Our long-term market model remains bearish as of December 8th. The total universe of stocks, ETF’s and mutual funds which we review on a daily basis is 1877. Of those reviewed, 456 are rated "Buy," 429 are rated "Sell" and 992 "Neutral." Our model portfolios are currently allocated between 37.5% and 75% long currently.

To be sure, we see continued opportunities for adding alpha to existing portfolios in both the Mid Cap and Small Cap market segments. For those risk-averse investors, alpha can be found within the following sectors: Transports (IYT), Telecommunication (IYZ), Retail (RTH) and Consumer Services (IYC).

Short-Term Technical Indicators

Investor Sentiment

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

Asset Allocation – AAS Model Portfolios are between 37.50% 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 Transports (IYT 2/20/07)

Today’s Top “Buy” Recommended Stocks

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

Vulcan Materials Co. (VMC 10/31/06)

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

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

Texas Industries Inc. (TXI 10/11/06)

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

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

OM Group Inc. (OMG 2/7/07)

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

Cleveland-Cliffs Inc. (CLF 11/17/06)

Today’s Top “Sell” Recommended Stocks

New Century Financial Corp. (NEW 6/13/06)

Chicago Mercantile Exchange (CME 2/22/07)

Google Inc. (GOOG 12/18/06)

SanDisk Corp. (SNDK 10/20/06)

Daktronics Inc. (DAKT 2/14/07)



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