Portable Alpha Daily

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Thursday, May 17, 2007

Mid-Week Alpha

Yesterday we sent our Platinum level subscribers an early morning alert indicating that our Major Market Model had turned bearish overnight and that we would be adjusting our model portfolio allocation recommendations accordingly in our next issue. We have done so and the adjusted allocations may be viewed below. Unfortunately we neglected to inform the private equity players on Wall Street of our market model change and as such the Dow again closed at record highs while both the Nasdaq and the S&P 500 enjoyed solid days.

The markets have been exceedingly bullish for the past several weeks - fueled by buyout and merger activity, stronger than expected first quarter earnings growth and a global economic boom. Inflationary concerns have been mostly muted and the meltdown in the sub-prime sectors has been moved to the back burner. Even the geopolitical front has been relatively quiet, save for some foiled terror plots and saber-rattling from Chavez. Unfortunately our market model isn’t designed to take these issues into account. It does however incorporate breadth analysis, which we believe is a very significant test of the markets staying power. And it’s the weakening of late in the breadth of the market that has culminated in a market model reversal from bullish to bearish.

This very well could be a short-term reaction to the last few trading sessions which have seen gains in the Dow but losses in the S&P 500 and Nasdaq. Or it could be an early warning of a dramatic market correction much more amplified than the one experienced in February. As the saying goes, it’s better to be safe than sorry, so it’s our decision to re-allocate the model portfolios into cash for the time being.

At Tuesday’s close over 55% of the NYSE volume was on the down side while over 75% of the Nasdaq volume was down. Yesterday, downside volume had declined to 38% on the NYSE and to 39% on the NASDAQ. Both the short-term moving averages of Breadth and Volume have been declining for the past week and are on the verge of crossing into negative territory. It will most likely take more than a little good news on the M&A front to turn these indicators around now that earnings season is just about over and most of the big boys will be heading to the Hampton’s soon.

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)

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

ITT Educational Services Inc. (ESI 2/8/07)

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

CIGNA Corp. (CI 1/29/07)

Apple Inc. (AAPL 4/23/07)

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

U.S. Steel Corp. (X 2/28/07)

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

Top AAS Rated Short Stocks for Alpha

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

Rogers Corp. (ROG 12/6/06)

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

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

Whole Foods Market Inc. (WFMI 5/2/07)


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