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Wednesday, June 06, 2007

Mid-Week Alpha

As expected in light of the recent market weakness, the AAS Market Model remains Bearish as it has been since Tuesday, May 15, 2007. The total universe of stocks, ETF’s and mutual funds which we review on a daily basis is 1828. Of those reviewed, 618 are rated "Buy," 677 are rated "Sell" and 533 "Neutral”.

In the previous newsletter, we indicated to our Platinum level subscribers that the recommended allocations in the Model Fund and Stock portfolios were to be increased to 75% invested and 25% in cash. We will be closely monitoring various indicators within our models, especially those targeting volatility and momentum, over the coming days. If we continue to experience broad-based weakening, we may substitute an inverse fund for the 25% cash allocation or perhaps raise cash levels back to 50%. Until then, we advise our subscribers to favor the lower end of the recommended allocation range.

The recent upward adjustment in our recommended allocation range was triggered by the improvement in the Technical Indicators which are followed by the model. Market Breadth has been generally positive of late. Advancing issues continued to outnumber declining issues as evidenced by the slope of A/D line. The shorter-term indicators of both Breadth and Volume, which are monitored by the model, are positive (although weakening) and the histograms of these indictors are more reflective of the August - September 2006 period than the spring sell-off last year. As you may recall there was a stalling in the markets last summer prior to the resurgence beginning in late July which took the S&P 500 to a double-digit gain for the year.

Other indicators show the market to be in an overbought status, and with relatively thin economic events this week the trading volume is likely to remain light, thereby exacerbating the daily volatility of the markets. We could continue to see some pullback over the next few days. In addition, we’re beginning to observe caution flags being raised by institutional analysts, notably from Morgan Stanley yesterday. If the big boys begin taking profits in mass and adjusting their portfolios for the summer, we can expect several days or weeks of declines.

U.S. stocks are having difficulty staying on their record run, due primarily to frothiness in the M&A / LBO sphere as well concerning economic reports. Since nature abhors a vacuum, traders are now focusing on conjecture rather than fact, which again creates more short term volatility.

Yesterday’s market action will most likely be reported by the media as a reversal in the direction of the markets fueled by growing inflation concerns. These concerns are driven by comments of both Fed Chairman Bernanke and Federal Reserve Bank of Cleveland President Pianalto concerning the fact that labor costs rose three times faster than the government's previous estimate last quarter. The comments sent stocks to their biggest two-day decline since late in the first-quarter of this year. In our opinion it would be premature to signal a reversal in the positive momentum of the market at this time without additional follow through or confirmation.

The market internals are definitively negative for yesterday. Decliners beat advancers by a 4 to 1 margin on the NYSE and by a 2 to 1 margin on the NASDAQ. About 85% of the volume was on the down side on the NYSE while about 75% of the volume was down on the NASDAQ. None of the major sectors were spared in the decline. Basic Materials and Utilities appear to have been hit hardest.

As might be expected, Bond prices climbed in the face of the decline in equities. The 5-year treasury rose to a yield of 4.934%, the 10-year Treasury note closed yielding 4.968% and the 30-year bond ended at 5.082%.

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 25% cash and 75% long.

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

Top AAS Rated Major Market – iShares S&P Mid Cap 400 (IJH 3/20/07)

Top AAS Rated Style-Box for Alpha – iShares Morningstar Small Cap Growth (JKK 5/21/07)

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

Top AAS Rated Long Stocks for Alpha

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

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

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

Apple Inc. (AAPL 4/24/07)

Google Inc. (GOOG 5/29/07)

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

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

LandAmerica Financial Group Inc. (LFG 2/8/07)

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

Martin Marietta Materials Inc. (MLM 11/6/06)

Top AAS Rated Short Stocks for Alpha

Rogers Corp. (ROG 12/6/06)

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

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

Komag Inc. (KOMG 12/11/06)

Regeneron Pharmaceuticals (REGN 5/17/07)

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