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Friday, March 02, 2007

Alpha in Inverse Funds

We’ve begun to introduce inverse funds into our model portfolios in response to the deteriorating market and consequent weakening in our macro model. More importantly, the inverse funds we analyze are obviously generating extraordinary alpha and momentum over the short-term. The five portfolios are still predominantly long or in cash, but three of the four fund portfolios have inverse fund allocations in an attempt to hedge against further downside risk.

Right now both the Model Rydex and Model Fidelity portfolios have a 12.5% allocation in the Rydex Inverse Dynamic Dow 30 (RYCWX) fund. Rydex inverse funds are available within Fidelity brokerage accounts, which is why they’re included in the Fidelity portfolio. Our Model ProFund portfolio has a 25% inverse fund allocation, with 12.5% in both the ProFunds Ultra Short OTC (USPIX) and the ProFunds Short Precious Metals (SPPIX) funds. I consider this an aggressive inverse allocation based on the current market environment, but it’s in line with our portfolio strategy.

Despite the volatility and Dramamine-inducing trading sessions, alpha is still being generated on the long side. Here is a list of today’s New Buys that have AAS Rating Scores greater than 5.

Conversely, taking the short / sell side has tremendous potential. Here is a list of today’s New Sells that have AAS Rating Score greater than -5.

Short-Term Technical Indicators

Investor Sentiment

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

Asset Allocation – AAS Model Portfolios have between 50% and 62.50% cash allocations and mixed long – short allocations.

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 – No buy recommended sector investments.

Today’s Top “Buy” Recommended Stocks

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

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

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

Hyperion Solutions Corp. (HYSL 2/16/07)

Weyerhaeuser Co. (WY 1/3/07)

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

Blue Coat Systems Inc. (BCSI 3/1/07)

Avnet Inc. (AVT 10/5/06)

The Goodyear Tire & Rubber Co. (GT 8/24/06)

TXU Corp. (TXU 2/23/07)

Today’s Top “Sell” Recommended Stocks

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

Google Inc. (GOOG 12/18/06)

Fremont General Corp. (FMT 12/29/06)

Plexus Corp. (PLXS 12/29/06)

SanDisk Corp. (SNDK 10/20/06)

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