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Sunday, May 06, 2007

Alpha and the Week Ahead

Despite another up week, we believe that the market is due for another short-term pullback. At least that’s what our “gut reaction” is after another week of gains on modest earnings, decent economic reports and above average M&A activity. Nevertheless, our technical market model remains “cautiously bullish,” which in our case is more important than our gut feelings.

Speculation that the Federal Reserve will cut interest rates soon was revived by the news that jobs only grew by 88,000 in April following a 177,000 gain in March, a much smaller number than previously estimated. The jobless rate rose to 4.5 percent from 4.4 percent, which matched a five-year low. Hourly earnings also grew at a rate that trailed economists' forecasts. Concerns that the economy is slowing are also being bolstered by the releases of the S&P 500 companies having reported first-quarter earnings thus far. While the majority have reported an increase in year over year earnings growth, the rate appears to be coming in around 9%, down from the double digit gains of recent years, but better than the earlier expectations.

We now see alpha opportunities in 50% of the Major Markets which the newsletter tracks led the by the Dow (DIA) and S&P 500 (IVV) and the NASDAQ 100 (QQQQ). This is confirmed with both the Mid Cap Growth (JKH) and Large Cap Value (JKF) continuing to be rated an AAS Buy. A deeper review of the Sectors listed on the Market Overview page will highlight the emergence of the “Global” aspect of those sectors rated an AAS Buy. Drilling further into the Portfolio Builder page will surface the dominance of the Europe, Natural Resources, Utilities, International, Energy, Pharmaceutical, Healthcare, Technology and Communications sectors all rated an “AAS Buy.”

The candidates from all these sectors and cap groups are far too numerous for us to list in this commentary but we have extracted a manageable number for further examination. We have attempted to identify those candidatures which may be just beginning to emerge into a strong upward trend.

A few of the Stocks selected from the Sector Groups include the obvious winners from last week: Amazon.com Inc (AMZN), Varian Semiconductor Equip (VSEA), Novatel Wireless Inc (NVTL), Regeneron Pharm Inc (REGN), ArQule Inc (ARQL), Chaporral Steel (CHAP), Schering Plough Corp (SGP), Commscope Inc (CTV), Pharmanet Dev Group Inc (PDGI), W-H Energy Svcs Inc (WHQ), NetGear Inc (NTGR), PDL Biopharma Inc (PDLI), Myers Industries, Inc. (MYE), Portfolio Recovery Associates Inc (PRAA), Advanced Energy Industries Inc (AEIS), Pioneer Natural Resource Co (PXD), Baker Hughes Inc (BHI), Plexus Corp (PLXS), Flir Sys Inc (FLIR) and Atwood Oceanics (ATW).

It is in the area of ETF’s and Mutual Funds where we can begin to see the Global direction which money flow appears to be taking. While still employing the Top Down approach used above the following warrant your attention: ProFund Ultra Sector Oil & Gas (ENPIX), iShares MSCI South Africa (EZA), PowerShares Dynamic Oil & Gas (PXJ), iShares MSCI Malaysia (EWM), iShares MSCI Brazil (EWZ), iShares MSCI Sweden (EWD), iShares MSCI Netherlands (EWN), Rydex Energy Services (RYVIX), Oil Service HOLDRS (OIH), ProFund Ultra Dow 30 (UDPIX), Rydex Dynamic Dow (RYCVX), iShares MSCI Germany (EWG), ProFund Ultra Sector Utilities (UTPIX), Rydex Dynamic OTC (RYVYX), ProFund Ultra Sector Biotechnology (BIPIX), ProFund Ultra OTC(UOPIX), ProFund Ultra Sector Pharmaceuticals (PHPIX), iShares S&P Latin America 40 (ILF), Power Shares Dynamic Energy Explor. (PXE), Fidelity Select Energy Service (FSESX).

Short-Term Technical Indicators

Investor Sentiment

Long-Term Market Model – Bullish since April 27, 2007

Asset Allocation Recommendation – AAS Model Portfolios are allocated at 75% cash and 25% long.

Top Alpha Generating Securities
Date = Date of AAS “Buy” or “Short/Sell” Recommendation

Top AAS Rated Major Market – Diamonds Trust, Series 1 (DIA 5/3/07)

Top AAS Rated Style-Box for Alpha – iShares Morningstar Mid Cap Growth (JKH 3/20/07)

Top AAS Rated Sector for Alpha – iShares Dow Jones U.S. Utilities (IDU 3/12/07)

Top AAS Rated Long Stocks for Alpha

Amazon.com, Inc. (AMZN 3/21/07)

Varian Semiconductor (VSEA 3/27/07)

Chaparral Steel Co. (CHAP 11/1/06)

Chemed Corp. (CHE 3/8/07)

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

Dow Jones & Co. Inc. (DJ 5/4/07)

Manitowoc Co. Inc. (MTW 3/16/07)

Reliance Steel & Aluminum (RS 1/23/07)

Pre-Paid Legal Services Inc. (PPD 3/7/07)

Nash-Finch Co. (NAFC 2/21/07)

Top AAS Rated Short Stocks for Alpha

Chicago Mercantile Exchange Holdings (CME 3/15/07)

The Corporate Executive Board Co. (EXBD 12/1/06)

Google, Inc. (GOOG 12/18/06)

RTI International Metals (RTI 5/1/07)

Public Storage Inc. (PSA 2/28/07)

Review of Last Week’s Top AAS Rated Stocks

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