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Sunday, May 20, 2007

Alpha and the Week Ahead

Fueled by a benign CPI report and a continuation in the recent mind boggling level of corporate deal making, U.S. Equity Markets continued their bull run this past week as most of the major averages posted gains. Grabbing the headlines’ almost daily are the record breaking closing numbers of the Dow Jones Industrial Index which is up 8.8% year-to-date followed by the S&P 500 Index up 7.6% and the NASDAQ Composite Index up 5.9%.

But more amazing are the less spotlighted gains of the Dow Jones Utilities (up 16.8% thus far in ’07), the Dow Jones Transports (up 14.3%), the S&P Mid Cap 400 (up 11.7%) and the Energy Index up (11.4%). We have focused on all of these sectors in our commentary over the past several months as recommended areas of alpha generation.

Despite the record highs in the major indexes, the technical condition of the market has deteriorated some this week. The advance/decline lines for both the NYSE and the NASDAQ lost some ground, a sign that the bullish momentum is losing strength. An abundance of liquidity continues to support this market along with a fair amount of skepticism on the sentiment front.

The AAS Market Model turned Bearish as of the close Tuesday, May 15, 2007. Again, the Technical component of the model was the deciding factor. The total universe of stocks, ETF’s and mutual funds which we review on a daily basis is 1,833. Of those reviewed, 572 are rated "Buy," 653 are rated "Sell" and 608 "Neutral”. The recommended allocation in the Model Fund Portfolio’s was immediately reduced to 50% invested and 50% in cash while in the Model Stock Portfolio the allocations is being reduced as individual securities loss their directional trend or violate a internal Sell rule.

Market Outlook and Alpha Potential

Equities: Recently reported by Standard & Poor's Chief Technical Strategist Mark Arbeter, the technical picture for the S&P 500 indicates the benchmark will probably eclipse its record closing high of 1527.46, set on March 24, 2000, sometime in May or June of this year. If history can serve as a guide (but remember past performance is no guarantee of future results), we will likely see sub-par price performance in the first month following the setting of a new high, and then find above-average price appreciation in the three and six months after.

Bonds: Our friends at Vining Sparks point out that yields rose sharply over the past week as technical support failed amid a continuation of the mixed bag of economic reports. The five and ten-year Treasuries had their worst week since June of 2006 as both yields broke through April’s highs and closed in on January’s peaks, which were the highest yields seen since last summer. From a technical perspective, bonds now look quite attractive and a meaningful reversal should be considered quite possible. In addition to the technicals, seasonal factors tend to aid bonds at this time of year. In the past 20 years, five and ten-year yields have fallen 14 times in June, tying December and September as months with the best batting averages.

For those interested in seeking alpha during the week ahead we suggest starting with a hard look inside the Large Cap Value (JKF) and the Mid Cap Growth (JKH) Style boxes. Moving into sector analysis we suggest Energy (IYE), Natural Resources (IGE), Global Energy (IXC), Utilities (IDU), Basic Materials (IYM) or Telecom (IYZ).

Following this line of research the ten most attractive Mutual Funds or ETF’s would include: iShares MSCI Brazil(EWZ), ProFund Ultra Sector Oil & Gas (ENPIX), ProFund Ultra Dow 30 (UDPIX), Rydex Dynamic Dow (RYCVX), Oil Service HOLDRS (OIH), iShares S&P Latin America 40 (ILF), Fidelity Latin America (FLATX), Rydex Energy Services (RYVIX) or Fidelity Select Energy Service(FSESX).

Individual Equities Domestic or International to further research would include Encana Corporation (ECA), BCE Inc (BCE), Baker Hughes Inc (BHI), Valero Energy Corp (VLO), Grant Prideco Inc. (GRP), Alcoa Aluminum (AA), Embarq Corp (EQ), USX Marathon Group (MRO), Merck & Co Inc (MRK), Public Svc Enterprise Group (PEG), Entergy Corp (ETR), Freeport-McMoran Copper & Gold (FCX), Verizon (VZ), Excelon Corp (EXC), Enersis SA ADA (ENI), Qwest Communication International (Q), Suncor Energy Inc (SU), Schlumberger Ltd. (SLB) or Chevron Texaco Corp (CVX).

Additional information on our firm may be found by clicking the following link, Alpha Advisor Service, LLC. Information concerning the availability of our newsletter is available by clicking AAS Information. Questions may be submitted to info@Alpha-Advisor.com.

Short-Term Technical Indicators

Investor Sentiment

Long-Term Market Model – Bearish since May 15, 2007

Asset Allocation Recommendation – AAS Model Portfolios are allocated at 50% cash and 50% 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 Large Cap Value (JKF 5/3/07)

Top AAS Rated Sector for Alpha – iShares Dow Jones U.S. Energy (IYE 3/19/07)

Top AAS Rated Long Stocks for Alpha

· CPI Corp. (CPY 1/23/07)

· Crocs, Inc. (CROX 5/9/07)

· Chaparral Steel Co. (CHAP 11/1/06)

· Amazon.com, Inc. (AMZN 3/21/07)

· Apple Inc. (AAPL 4/24/07)

· ITT Educational Service Inc. (ESI 2/8/07)

· CIGNA Corp. (CI 1/29/07)

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

· National-Oilwell Varco Inc. (NOV 3/7/07)

· U.S. Steel Corp. (X 2/28/07)

Top AAS Rated Short Stocks for Alpha

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

· Public Storage Inc. (PSA 2/28/07)

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

· Rogers Corp. (ROG 12/6/06)

· Simon Property Group Inc. (SPG 5/1/07)

Review of Last Week’s Top AAS Rated Stocks


2 Comments:

  • Am I not a "blog of interest"?

    waaaaaaaa!

    By Blogger Trading Goddess, at 1:14 AM  

  • Yeah I need to do a better job keeping my "blogs of interest" up to date. I've actually been visiting your site for awhile now. Well done! Thanks for the support and keep up the great work.

    By Blogger Justin, at 6:04 AM  

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