Portable Alpha Daily

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Wednesday, June 13, 2007

Mid-Week Alpha

Reversing Tuesday’s losses in dramatic fashion, the bulls led the markets higher yesterday and pushed the Dow to its daily biggest gain in almost 11 months. A flurry of reports indicated full steam ahead for the U.S. economy, led by a consumer seemingly indifferent to price pressures. As if that weren’t enough to propel the indexes higher, interest rates reversed course, closing below the psychologically significant 5.25% level.

With Friday being an options expiration day, we’re expecting more volatility in the markets for the rest of the week. In fact, we’re expecting elevated volatility on a global scale over the next few months for several reasons. As mentioned before, this market is not being fueled by fundamentals. Instead, the driving force is the abundance of liquidity (easy credit) which is fostering unprecedented levels of M&A and LBO.

With over $82 billion in deals for the month of May alone, PE firms are jumping on just about any opportunity they can, knowing that within months the liquidity will begin to dry up and such deals will be more difficult to close. Our concern and what we feel our subscribers should be concerned about, is what will happen to the market when it’s no longer propped up by the abundance of liquidity.

As such, we remain conservatively bearish at this time. We have concerns that the levels of risk manifest in the market are being ignored. We’re cognizant that liquidity will, in all likelihood, remain abundant throughout the summer, which will potentially foster more gains. Assuming nothing substantial occurs on the geopolitical landscape, or we don’t have another devastating hurricane season, it’s reasonable to expect a modest up-trend for the summer albeit with elevated volatility. We’re going to try to capture as much of that up-trend as possible while being positioned conservatively to minimize volatility.

The AAS Market Model 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 1827. Of those reviewed, 448 are rated "Buy," 838 are rated "Sell" and 541 "Neutral”. We have lowered our recommended allocation in the Model Fund and Stock Portfolios to 25% invested and 75% in cash.

There currently exists a dislocation in the technical condition of the markets; we are now seeing a negative bias with regard to breadth and short-term market momentum. However, analysis of trading volume shows it has resumed its positive stance. This condition typically occurs shortly after a market bottom and a resurgence of the up-ward trend.

There are several interesting adjustments in the model fund portfolio’s, particularly with regard to the surfacing of the ProFunds Short Real Estate Fund (SRPIX) and the Rydex Dynamic Strengthening Dollar Fund (RYSBX). This is a purely-momentum based selection in response to last week’s weak market activity. Also noteworthy is the continuing reduction in the Model Stock Portfolio allocation due to loss prevention rules. We will continue to see sector rotation as the markets trade on M&A news and sentiment for the next few weeks. Once the second quarter earnings are released in July, we expect fundamentals to being to take over.

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 NYSE Composite (NYC 5/3/07)

Top AAS Rated Style-Box for Alpha – iShares Morningstar Mid Cap Growth (JKH 5/29/07)

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)

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

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

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

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

Cummins Inc. (CMI 1/31/07)

Apple Inc. (AAPL 4/24/07)

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

Marathon Oil Corp. (MRO 3/14/07)

Top AAS Rated Short Stocks for Alpha

Volt Information Sciences Inc. (VOL 3/26/07)

Rogers Corp. (ROG 12/6/06)

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

Public Storage (PSA 2/28/07)

RTI International Metals (RTI 5/1/07)


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