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Sunday, June 24, 2007

Alpha and the Week Ahead

The coming week will likely experience a continuation of the recent volatility - but with a heavy dose of economic reports scheduled for release, we’re expecting to see the indexes close marginally higher for the week. Most investors will be waiting for the outcome of the Federal Reserve's interest rate meeting on Thursday, as well as personal income and spending reports, home sales and manufacturing activity throughout the week. The direction of bond yields, which have been on the rise lately, will be a key factor with the yield curve normalizing this past week from a flat slope over the past several months.

With oil prices closing above $68 a barrel and renewed apprehension surrounding the sub-prime market calamity, it’s not surprising that the markets sold off on Friday. The devastating collapse of two cross-collateralized Bear Sterns hedge funds resurrects an issue many investors had put on the back burner: whether the market has experienced the full extent of the sub-prime mortgage debacle. Furthermore, strikes on Nigerian oil fields coupled with the beginning of “driving season” are pushing oil prices higher, which the American consumer isn’t fond of.

At quarters end, professional investors begin to worry about last-minute jolts to their portfolios. And, as always, companies whose upcoming results won’t meet analyst expectations begin to confess their shortcomings. Even more telling in our opinion, is the large pool of corporate bonds which are awaiting issuance over the next several weeks. Concerns are already brewing over how easily the market can swallow the awaiting pool. This potentially means that Private-equity firms, which have shored up the much of market this year, may struggle in their future attempts to raise funding if any of the pending bond sales go poorly.

Hopefully you’ve noticed the returns of the AAS Model Stock Portfolio - up 11.24% year-to-date as compared to the benchmark S&P 500 Index which is up 5.94% for the same period. We’re quite happy with the results so far, especially considering the portfolio has been only 50-75% allocated for much of the year. We’ve also developed a long-short equity portfolio listed below. This strategy is up 6.62% since the introduction on May 29th as compared to the benchmark S&P 500 Index which is down -1.02%. We’re exceedingly excited by this approach not only because of its strong performance so far, but in its ease of use for AAS subscribers.

In light of last week’s declines, the only Major Market still rated an “AAS Buy” is the NASDAQ 100 (QQQQ). However, ten of the twenty-one sectors analyzed for alpha are still rated an “AAS Buy.” There was no change in the leadership over the past week with iShares Dow Jones U.S. Energy (IYE) maintaining its dominance followed by iShares Goldman Sachs Natural Resource (IGE) and iShares S&P Global Energy (IYM). Rounding out the top five are iShares Dow Jones Basic Materials (IYM) and Internet Architecture HOLDRS (IAH). The only sector analyzed that turned in a positive week was the iShares GS Semiconductor (IGW) which gained 0.20% for the week. The remaining members, while down for the week, all did better than the broad markets. Alpha-producing securities from the top sectors include:

Energy and Natural Resources: National Oil well Varco Inc (NOV), Transocean Sedco Forex Inc (RIG), Schlumberger Ltd.(SLB), Noble Drilling Corp (NE), Atwood Oceanics (ATW), Fidelity Select Energy Service (FSESX), Oil Service HOLDRS (OIH), iShares GS Natural Resource (IGE), ProFund Ultra Sector Oil & Gas (ENPIX) and Rydex Energy (RYEIX).

Basic Materials: Martin Marietta Materials (MLM), Cleveland Cliffs Inc. (CLF), USX-U S Steel (X), Chaporral Steel (CHAP), Freeport-McMoran Copper & Gold (FCX), Fidelity Select Materials (FSDPX), Vanguard Materials (VAW), ProFund Ultra Sector Basic Materials (BMPIX), Rydex Basic Materials (RYBIX), iShares DJ U.S. Basic Materials (IYM) and Fidelity Select Chemicals (FSCHX).

Technology: MIVA Inc (MIVA), Cree Research Inc (CREE), Novatel Wireless Inc. (NVTL), Blue Coat Sys Inc. (BCSI), NVIDIA Corp (NVDA), Fidelity Select Technology (FSPTX), Fidelity Select Computers (FDCPX), Internet Architecture HOLDRS (IAH), ProFund Ultra Sector Technology (TEPIX), ProFund Ultra Sector Semiconductors (SMPIX), Rydex Internet (RYIIX), Rydex Technology (RYTIX) and Rydex Electronics (RYSIX).

We continue to believe that it is best to remain conservatively allocated in line with the recommendation of the AAS Market Model which turned Bearish as of the close Tuesday, May 15, 2007. The total universe of stocks, ETF’s and mutual funds which we review on a daily basis is 1821. Of those reviewed, 357 are rated "Buy," 831 are rated "Sell" and 633 "Neutral”. While we remain conservatively bearish, our Model Fund and Stock Portfolios to 50% invested and 50% in cash. Until the model turns bullish, we will likely maintain at least 25% of the portfolios in cash.

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 – Nasdaq 100 Trust Shares (QQQQ 5/31/07)

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. Energy (IYE 3/19/07)

Top AAS Rated Long Stocks for Alpha

Martin Marietta Materials (MLM 11/6/06)

Crocs, Inc. (CROX 5/9/07)

Google, Inc. (GOOG 5/29/07)

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

Deckers Outdoor Corp. (DECK 9/7/06)

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

Apple Inc. (AAPL 4/24/07)

Cummins Inc. (CMI 1/31/07)

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

Precision Castparts Corp. (PCP 9/20/06)

Top AAS Rated Short Stocks for Alpha

Brush Engineered Material (BW 5/1/07)

RTI International Metals (RTI 5/1/07)

NBTY Inc. (NTY 6/7/07)

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

Hovnanian Enterprises Inc. (HOV 12/21/06)

Review of Last Week’s Top AAS Rated Stocks
Highlighted securities are addition’s from the prior week’s portfolio

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