Portable Alpha Daily: Alpha and the Week Ahead

The AAS Market Model turned Bullish as of the close Friday, April 27, 2007. The Technical component of our model is the one which turned bullish and consequently shifted the overall model to bullish status. The total universe of stocks, ETF’s and mutual funds which we review on a daily basis is 1835. Of those reviewed, 331 are rated "Buy," 475 are rated "Sell" and 1029 "Neutral.” Because we view this market as overbought and unsustainable, we have chosen not to increase our model portfolio allocations to 100% long. Instead, we will maintain our current allocations of 75% long and 25% cash.

Despite the recent rally and recovery, it’s difficult not to be concerned that the market is even more primed for a sell-off than it was in late February. When you look at the dynamics of the markets over the last few weeks you’ll see a significant increase in oil prices, the continued decline in the dollar, corporate earnings growth tapering off, the economy slowing and now the entry into the summer trading session. Although the bulls are clearly running the show, the bears are lurking around the corner, and this is cause for concern, especially since the full effects of the housing correction may not have been realized yet.

Even though the market has experienced a nice recovery and upside acceleration, some of the data we monitor are showing an increase in fear, not optimism. We see momentum indicators such as the relative-strength index, stochastic, and TRIN as having moved into overbought territory, which is obviously a negative. Friday’s breadth numbers on both the NYSE and the NASDAQ were again weak. Our reading of Investors Sentiment remains Neutral. In additional, we are just weeks away from the beginning of the summer season, which traditionally is subject to accelerated volatility with the majority of professional investors either on the sidelines or working reduced weeks for the summer season. In previous years this scenario typically produced a recipe for caution.

Short-Term Technical Indicators