Alpha and the Week Ahead

The fifteen position long/short equity portfolio (shown at bottom of post) performed well again last week, up 0.77%. The equally-weighted ten long positions contributed -5.35% for the week, but the five equally-weighted short positions returned 13.89%. We’ve adjusted our calculation procedures to make the performance shown more portfolio-oriented. We initiated this portfolio on Tuesday, May 29^th 2007. Since then it’s up 9.74% compared to -3.90% for its benchmark, the S&P 500.

Today’s Alpha Advisor Service, LLC newsletter is unusual in that there are so few buy-rated securities available for our subscribers. According to our analysis there are only 80 securities out of 1800+ which are currently buy-rated as compared to the daily average of 410 since we first began publishing the newsletter. We took this statistic one step further and found that market bottoms have occurred in the S&P 500 when the number of AAS buy-rated securities fell below 100. These market bottoms transpired in October 2005, in June 2006 and most recently in March 2007. While short-lived, these bottoms represented periods of significant asset class rotation followed by the resumption of the bullish trend.

We believe that the U.S. equity markets (and by default the global markets) will continue to recede next week. Although faced with a significant round of corporate earnings from almost 100 S&P 500 companies as well as economic reports on payrolls, wages and manufacturing, nervousness from last week will carry forward, not only from the retail investor but from the hedge funds and prop desks struggling to contain the losses.

Thus far the companies who have reported earnings have beaten expectations by a slightly lower margin than in the recent past. Out of the 304 companies of the S&P 500 that have reported, approximately 64% have beaten estimates as compared with an average of 68% over the past eight quarters.

Concerns over the collapse in the sub-prime mortgage sector and the related policy changes within the banks that have been providing debt funding to the LBO markets will continue to fuel the day to day volatility of the markets. Investors next week will remain on the lookout for more hedge fund troubles. News broke this past week that a second Australian hedge fund has run into trouble because of its exposure to U.S. sub-prime mortgages. There are also unsubstantiated rumors about German and Japanese funds taking a hit from bad U.S. home loans.

We recommend a defensive portfolio allocation 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 1802. Of those reviewed, 80 are rated "Buy," 1070 are rated "Sell" and 652 "Neutral”. We remain bearish, and our Model Fund and Stock Portfolios are allocated around 0% to 25% long and 75% to 100% defensive.

There are no AAS buy-rated Markets, Sectors or Styles this week. In fact, the only buy-rated security on our Market Overview page is the iShares Lehman 1-3 Year Bond (SHY). However, on the ProFund and Rydex mutual fund pages we see alpha generating securities in the inverse index and sector funds. Further analysis highlights alpha in the Bond, Commodity, International and Alternative Product sectors.

Despite last week’s troubles, there are still alpha-generating securities available. The list below comes from our Top Ten page of the newsletter and the securities listed are biased towards Medical, Energy and Inverse investment opportunities.

Equities: Sturm Ruger (RGR), Hanesbrands Inc (HBI), Cabot Microelectroics (CCMP), Lennox International (LII), DJ Orhtopedics Inc (DJO), Astec Inds Inc (ASTE), Smith A O Corp (AOS), Deckers Outdoor Corp (DECK), National Oilwell Varco Inc (NOV), Biogen IDEC (BIIB), Plantronics Inc (PLT), Cummins Inc (CMI), Gen-Probe Inc (GPRO), IDEXX Laboratories Inc. (IDXX), FMC Technologies Inc. (FTI), ITRON Inc. (ITRI), Sandisk Corp (SNDK), Anixter International Inc (AXE), Precision Castparts Corp (PCP), Schlumberger Ltd. (SLB), Mgi Pharma Inc (MOGN), Noble Drilling Corp (NE), Air Prods & Chems Inc (APD), Transocean Sedco Forex Inc (RIG) and Washington Post Co Clb (WPO).

ETF’s and Mutual Funds: ProFund Ultra Short Small Cap (UCPIX), ProFund Ultra Short Mid Cap (UIPIX), ProFund Short Real Estate (SRPIX), ProFund Ultra Bear (URPIX), Inverse S & P 500 Strategy (RYTPX), Inverse Russell 2000 Strategy (RYSHX), ProFund Short Small Cap (SHPIX), Inverse Dow 2x Strategy (RYCWX), ProFund Ultra Short Dow 30 (UWPIX), Inverse Mid Cap Strategy (RYMHX), Inverse OTC 2x Strategy (RYVNX), ProFund Ultra Short OTC (USPIX), Inverse S & P 500 2x Strategy (RYURX), ProFund Bear (BRPIX), ProFund Short Oil & Gas (SNPIX), Inverse OTC Strategy (RYAIX), ProFund Short OTC (SOPIX), iShares Lehman 1-3 Year Bond (SHY), Commodities Strategy (RYMBX), Strengthening Dollar 2x Strategy (RYSBX), iShares GSCI Commodity-Index Trust (GSG) and ProFund Rising U.S. Dollar (RDPIX).

A word of caution about most of the Inverse funds listed above. They are leveraged between 1.25x and 2x the underlying benchmark. These funds are capable of producing significant out-performance during the appropriate periods in a market cycle. However, the leverage does produce significant short term price volatility, as such the investor is advised to establish tight stop loss limits and to keep a keen eye on these securities at all times.

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 - 100% cash and 25 - 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 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

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

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

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

Cummins Inc. (CMI 1/31/07)

FMC Technologies Inc. (FTI 3/7/07)

Transocean Inc. (RIG 4/20/07)

Astec Industries (ASTE 7/18/07)

Schlumberger Ltd. (SLB 3/7/07)

Noble Corp. (NE 3/23/07)

Itron Inc. (ITRI 7/12/07)

Top AAS Rated Short Stocks for Alpha

Beazer Homes USA Inc. (BZH 1/25/07)

Sears Holding Corp. (SHLD 5/3/07)

Meritage Homes Corp. (MTH 12/18/06)

Sepracor Inc. (SEPR 5/17/07)

Vulcan Materials Co. (VMC 5/10/07)

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

Alpha and the Week Ahead

Our fifteen position long/short equity portfolio (shown at bottom of post) had a very solid week, up over 4% on a price-weighted index basis. The equally-weighted ten long positions contributed -0.37% for the week, but the five equally-weighted short positions more than made up for the loss on the long side by returning over 4.5%. As you may recall, we initiated this portfolio on Tuesday, May 29^th 2007. Since then, the long/short portfolio has gained 15.08% compared to 1.05% for its benchmark, the S&P 500. We’re obviously very excited about this portfolio and the potential it provides.

For the few weeks we’ve urged our subscribers to exercise discretion in their portfolio allocations. Our opinion was that irrespective of the record high’s which the major markets have been reaching, the technical indicators of the market were not confirming the day-to-day up trends experienced. A quick review of today’s Market Overview page is enough to convince even our most Bullish subscribers that our advice was warranted and that prudence and caution in the coming week is strongly suggested.

Thursday’s record breaking rally pushed the market further into an over-extended status and Friday’s sell-off was truly overdue in our opinion. The Advance/Decline line has turned downward and is being confirmed by both the short-term breadth and volume indicators. Market trends, as measured by short-term MACD, have turned downward and while both the Relative Strength and Stochastic Oscillators are retracing towards more acceptable levels, they both still indicate an over-bought status.

For those investors still fully allocated on the long side, we suggest to watch the dynamic Sell Limit Values closely. Make sure to use the most current values from today’s newsletter while keeping a watchful eye on corporate earnings report this week. Maintain those holdings above their respective short-term moving average but look to close positions as they either drop below their dynamic Sell Limit Value or violate their short-term moving average. On the other hand, stocks that break upward through their short-term moving average and are confirmed by an AAS “Buy” recommendation should be viewed as strong candidates for purchase.

Friday’s sell-off wasn’t much of a surprise considering Thursday’s rally and options expiration. Not a single sector had a positive session Friday with the Financial sector turning in the weakest performance of the group. Financials continues to suffer from concerns that the sub-prime mortgage problem has not yet run its full course and that further credit related problems will surface. An interesting note is that last week CitiGroup’s price declined after announcing it was unable to syndicate several bridge loans it had made for leverage buyouts. As mentioned several times prior, fear is continuing to brew that the sub-prime problems will extend into a broader credit crunch and reduce investor liquidity, the crucial driving force behind the rally.

Not all was negative last week however as the Technology and Energy sectors ended higher. In fact, the only outright AAS “Buy” recommended sectors is iShares GS Networking (IGN) - the carryover leader from last week.

It was reported elsewhere that only 59% of the companies reporting earnings thus far this quarter have exceeded expectations as compared to approximately 68% of the reporting companies beating expectations over the past several years. The coming week will be the busiest of the second-quarter earnings season, in essence solidifying the corporate growth trend or lack thereof.

Listed below are the securities from the Top Ten page of our newsletter sorted by the AAS Rating Score in descending order. Of the fifty long-only securities, only thirty-three carry an AAS “Buy” recommendation, which further confirms our bearish view-point.

Top to Bottom: Apple Computers Inc (AAPL), Precision Castparts Corp (PCP), National Oilwell Varco Inc (NOV), Deckers Outdoor Corp (DECK), Blue Coat Systems Inc (BCSI), Shaw Group Inc (SGR), Freeport-McMoran Copper & Gold (FCX), Penwest (PENX), iShares FTSE/Xinhua China 25 (FXI), Robbins & Meyers Inc (RBN), FMC Technologies Inc (FTI), Fidelity Select Energy Service (FSESX), iShares MSCI South Korea (EWY), ProFund UltraSector Precious Metals (PMPIX), Fidelity Southeast Asia (FSEAX), Fidelity Select Technology (FSPTX), BLDRS Emerging Markets 50 ADR (ADRE), Fidelity Select Chemicals (FSCHX), Fidelity Select Computers (FDCPX), PowerShares Gld. Drg. Haltr. USX Ch (PGJ), Fidelity China Region (FHKCX), iShares GS Networking (IGN), Fidelity Select Air Transportation (FSAIX), Fidelity Select Indust. Equipment (FSCGX), PowerShares Wilderhill Clean Energy (PBW), Fidelity Select Gold (FSAGX), iShares GSCI Commodity-Index Trust (GSG), Fidelity Select Defense & Aerospace (FSDAX), iShares MSCI Taiwan (EWT), PowerShares Water Resources (PHO), Commodities Strategy (RYMBX), ProFund Short Real Estate (SRPIX) and finally BLDRS Asia 50 ADR (ADRA).

It’s interesting to note that of the thirty-three “buy” recommended securities, leadership is seen in the International, Energy and Industrial groups followed closely by Technology and Alternative Investment Products.

We continue to recommend a conservative portfolio allocation 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 1,806. Of those reviewed, 216 are rated "Buy," 779 are rated "Sell" and 817 "Neutral”. While we remain conservatively bearish, our Model Fund and Stock Portfolios are allocated around 50-75% invested and 0-25% 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 - 87.5% cash and 12.5 - 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 Mid Cap Growth (JKH 3/20/07)

Top AAS Rated Sector for Alpha – iShares Goldman Sachs Networking (IGN 5/31/07)

Top AAS Rated Long Stocks for Alpha

Apple Inc. (AAPL 4/24/07)

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

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

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

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

Shaw Group Inc. (SGR 5/4/07)

Freeport-McMoRan Cooper & Gold Inc. (FCX 3/8/07)

Penford Corp. (PENX 7/3/07)

Robbins & Myers Inc. (RBN 6/12/07)

FMC Technologies Inc. (FTI 3/7/07)

Top AAS Rated Short Stocks for Alpha

Beazer Homes USA Inc. (BZH 1/25/07)

Vulcan Materials Co. (VMC 5/10/07)

Sears Holding Corp. (SHLD 5/3/07)

Meritage Homes Corp. (MTH 12/18/06)

Children’s Place Retail Stores (PLCE 11/17/06)

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

Mid-Week Alpha

In Monday’s newsletter we cautioned that, “the bullish momentum is showing no signs of slowing down over the short term, however the market internals themselves, while improving, don’t look quite as positive as the price trends might indicate.“ The technical indicators continue to show signs of fatigue and the weakness is beginning to manifest itself in the equity markets. The topic du jour is still the sub-prime market, where fears from imprudent home loans and bad hedge fund bets continue to send shockwaves through Wall Street. Rumors spread yesterday about two more sizable funds on the brink of collapse, which in essence becomes a self-fulfilling prophecy. Additional pressure mounted following a report that the two levered Bear Sterns hedge funds are now virtually worthless. On the economic front, comments by Federal Reserve Chairman Ben Bernanke indicating to Congress that the sub-prime situation would likely get worse before getting better didn’t help the Bull’s much. Finally, earnings from major chip and tech companies disappointed investors, which also brought equities down.

Yesterday’s trading pattern in the last hour of the session, while comforting since it pared the majority of the day’s losses, will do nothing to help the general weakening technical condition of the market. The over- extended condition that carried into the week will warrant close monitoring over the next several sessions. In our opinion this pullback is likely to be short-lived and if today’s earnings reports are decent we may see another run at the 14,000 level for the Dow this week. One of the most important philosophies of Alpha Advisor Service is that winners have the tendency to continue to win, often pushing through pullbacks, and we expect the trend to continue.

Oil and Gas along with Utilities were the leading sectors for the day with the Tech and Financials bringing up the rear. As has been the case over the last few weeks, the financial sector is under pressure as analysts attempt to gauge the scope of the sub-prime market damage. The credit-ratings agencies are putting the market on notice that they’re considering downgrading a significant number of credit instruments.

The market showed little reaction to news that consumer prices increased a moderate 0.2% in June, a touch higher than the 0.1% expected, with falling energy prices offsetting rising food prices. The data was roughly in line with Wall Street forecasts. Also, the Commerce Department said June housing starts increased 2.3%, beating forecasts. But building permits fell 7.5% last month, indicating the upturn might be short-lived.

We continue to recommend a conservative portfolio allocation 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 1809. Of those reviewed, 233 are rated "Buy," 604 are rated "Sell" and 972 "Neutral”. While we remain conservatively bearish, our Model Fund and Stock Portfolios are allocated around 0-50% invested and 50-87% 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 between 50-87% cash and 0-50% 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 Mid Cap Growth (JKH 5/29/07)

Top AAS Rated Sector for Alpha – iShares Goldman Sachs Networking (IGN 5/31/07)

Top AAS Rated Long Stocks for Alpha

Apple Inc. (AAPL 4/24/07)

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

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

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

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

Shaw Group Inc. (SGR 5/4/07)

Crocs Inc. (CROX 5/9/07)

Penford Corp. (PENX 7/3/07)

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

Freeport-McMoRan Cooper & Gold Inc. (FCX 3/8/07)

Top AAS Rated Short Stocks for Alpha

Sears Holding Corp. (SHLD 5/3/07)

Beazer Homes USA Inc. (BZH 1/25/07)

Meritage Homes Corp. (MTH 12/18/06)

Lexmark International (LXK 1/25/07)

Children’s Place Retail Stores (PLCE 11/17/06)

Alpha and the Week Ahead

The market surged to record highs last week as investors actively sought securities of large cap industrials and multi-nationals. As expected after Thursday’s monstrous rally, the Dow Jones Industrial Average had the best showing, up 2.17% for the week, but the Nasdaq and S&P 500 performed strongly as well, up 1.52% and 1.44% respectively. Year-to-date the Dow is up 11.6% while the NASDAQ has gained 12.1% and the S&P 500 is up 9.46%.

The bullish momentum is showing no signs of slowing down over the short term, however the market internals themselves, while improving, don’t look quite as positive as the price trends might indicate. Nevertheless, the technical oscillators are in fact looking stronger now than they were at this time last year, which was about the point when the market rally of 2006 took off, and remained basically unabated until March 2007.

Friday’s gains were extremely impressive, as profit taking normally ensues after huge rallies. There was evidence though that trader's were cautious for the session, with advancers barely out-numbering decliners on the NYSE and actually lagging on the NASDAQ. Volume was evenly distributed on both exchanges.

We believe that bullish momentum is well in place as we head into the coming week. Earnings reports will flood the headlines and economic reports, including the release of June PPI and CPI, will grab Wall Street’s attention mid week. These reports, along with the trading activity driven by expiring option contracts on Friday, will lead to elevated volatility on Thursday and Friday.

The past week saw bonds traverse the developing trading range amid an abundance of economic data. The rise in prices is being driven by a “flight-to-quality” on more bad news surrounding the sub-prime market. Both S&P and Moody’s continue to downgrade ratings on approximately 1,012 issues backed by sub-prime mortgages representing over $12 billion. This forces hedge funds active in the sub-prime market to sell their holdings in order to abide by fund mandates, which turns paper losses into realized losses, fueling redemptions and eventual collapses. It’s becoming increasingly clear that the sub-prime “iceberg” was only partially visible and more financial failures are likely to occur before the debacle is over.

While all fourteen Major Markets analyzed by Alpha Advisor Service, LLC are currently rated “neutral,” we must point out momentum, as measured by the AAS Score, is improving in the Large Cap Indices - particularly in the NASDAQ and Dow. In addition, investor sentiment remains only slightly positive, which is bullish for stocks.

At this time we’re not seeing any strong “buy” rated securities with our Major Market, Style or Sector analysis. That’s not to say that alpha isn’t present in these areas, it just means that the trend hasn’t fully established itself yet. Further research within the Energy (Natural Resources), Internet, Materials and Industrial sectors should produce good opportunities. Finally, many International ETF’s and mutual funds are generating alpha, specifically in the Latin American and Asian regions.

Listed below are the top twenty securities from the above sectors ranked by the AAS Rating Score:

Apple Computers Inc (AAPL), Blue Coat Systems Inc. (BCSI), National Oilwell Varco Inc (NOV), Novatel Wireless Inc (NVTL), Nash Finch Co. (NAFC), NVIDIA Corp (NVDA), Transocean Sedco Forex Inc (RIG), FMC Technologies Inc (FTI), Frontier Oil Corporation (FTO), ConocoPhillips (COP), Noble Drilling Corp (NE), Cree Research Inc (CREE), Synapitics Inc (SYNA), Sanderson Farms Inc (SAFM), Schlumberger Ltd. (SLB), Bristow Group Inc (BRS), Oil Service HOLDRS (OIH), Spartan Stores Inc. (SPTN), Smith International Inc (SII) and the only mutual fund amongst the group Fidelity Select Energy Service (FSESX).

This coming week will also see the minutes of the June FOMC meeting released and Fed Chairman Bernanke will appear before Congress for the semi-annual (formerly known as Humphrey-Hawkins) testimony on the economy and monetary policy.

We continue to recommend a conservative portfolio allocation 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 1,811. Of those reviewed, 267 are rated "Buy," 444 are rated "Sell" and 1,100 "Neutral”. While we remain conservatively bearish, our Model Fund and Stock Portfolios are allocated around 50-75% invested and 0-25% 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 50-75% cash and 25-50% long.

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

Top AAS Rated Major Market – Fidelity Nasdaq Composite (ONEQ 6/1/07)

Top AAS Rated Style-Box for Alpha – iShares Morningstar Mid Cap Growth (JKH 3/20/07)

Top AAS Rated Sector for Alpha – iShares Goldman Sachs Networking (IGN 5/31/07)

Top AAS Rated Long Stocks for Alpha

Apple Inc. (AAPL 4/24/07)

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

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

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

Shaw Group Inc. (SGR 5/4/07)

Crocs Inc. (CROX 5/9/07)

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

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

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

Martin Marietta Materials (MLM 11/6/06)

Top AAS Rated Short Stocks for Alpha

Sears Holding Corp. (SHLD 5/3/07)

Beazer Homes USA Inc. (BZH 1/25/07)

Rogers Corp. (ROG 12/6/06)

Lexmark International (LXK 1/25/07)

Meritage Homes Corp. (MTH 12/18/06)

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

Mid-Week Alpha

Overall we feel that the market has behaved as anticipated through Wednesday, reacting with degrees of emotion to various news releases and remaining relatively flat through the first three days of the week. As you may recall from Monday’s commentary, we were forecasting a relatively modest week for U.S. stocks, primarily because we felt that the cloud of rising oil prices, sub-prime related problems and higher bond yields might rain on the earnings season parade that kicked off this past Monday. So far our projection is on track.

The Dow Jones Industrial Average rose 76.17 to 13577.87 on Wednesday putting it down about 0.25% for the first three days of the week and up 8.9% on the year. The S&P 500 added 8.64 to 1518.76, also down 0.68% thru mid week and up 7.1% year to date. The NASDAQ was up 12.63 to 2651.79, down 0.85% thus far and is 9.8% higher so far this year.

In the bond markets, the price of the 5–year note dropped slightly raising the yield to 4.979 percent, the 10– year note dropped 8/32nds, raising its yield to 5.09% and the 30–year bond declined 30/32nds to a yield of 5.191%.

On the New York Stock Exchange Wednesday, 1,803 stocks gained and 1,504 declined, on volume of 1.52 billion shares traded. Stocks making 52-week highs just barely out paced those making 52-week lows. Over at the NASDAQ, 2.06 billion shares traded on the exchange, with 1, 618 stocks up and 1,398 down for the session.

Dragging down equities is increased concern that the rating agencies will downgrade certain debt securities backed by sub-prime mortgages. Doing so would undoubtedly cause a massive sell-off of such securities, in turn devastating hedge fund portfolio returns and bringing to light more fund collapses. We’re also seeing “risk” beginning to get re-priced in the credit markets, causing spreads to widen and volatility to escalate. Also weighing on the markets were the inflationary comments made by Federal Reserve Chairman Ben Bernanke on Tuesday.

However, the negative news around sub-prime lending has not yet translated into lower investor sentiment which continues to help the equity market. Even though there are potential hazards in the market, we feel that alpha is still plentiful and available for the research oriented investor.

We continue to recommend a conservative portfolio allocation 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 1811. Of those reviewed, 267 are rated "Buy," 712 are rated "Sell" and 827 "Neutral”. While we remain conservatively bearish, our Model Fund and Stock Portfolios are allocated around 50-75% invested and 0-25% 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 between 63-75% cash and 38-50% long.

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

Top AAS Rated Major Market – Fidelity Nasdaq Composite (ONEQ 6/1/07)

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

Top AAS Rated Sector for Alpha – Internet Architecture HOLDRs (IAH 5/1/07)

Top AAS Rated Long Stocks for Alpha

Crocs Inc. (CROX 5/9/07)

Apple Inc. (AAPL 4/24/07)

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

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

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

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

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

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

Freeport-McMoRan Cooper & Gold Inc. (FCX 3/8/07)

Robbins & Myers Inc. (RBN 6/12/07)

Top AAS Rated Short Stocks for Alpha

Sears Holding Corp. (SHLD 5/3/07)

Beazer Homes USA Inc. (BZH 1/25/07)

Rogers Corp. (ROG 12/6/06)

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

Meritage Homes Corp. (MTH 12/18/06)

Alpha and the Week Ahead

The broad-market indices ended up for the week as expected. The DJIA closed at 13,611.68 on Friday for a weekly gain of 1.5%, the S&P 500 closed at 1,530.44 ending the week up 1.8%, and the NASDAQ ended at 2,666.51 improving by 2.4% over the holiday-shortened week. Year-to-date, the Dow is up 9.2% while the NASDAQ has gained 10.4% and the S&P 500 is up 7.9%.

The 5–year note declined 6/32nds to yield 5.094%, the 10-year note declined 10/32 to yield 5.187% and the 30-year bond was off 20/32 to 92-3/32, yielding 5.271%.

Indeed it was an impressive week, although we caution against getting too optimistic on gains experienced on such low trading volumes. On Friday, trading was below average on the NYSE, with about 1.25 billion shares changing hands, less than last year's estimated daily average of 1.84 billion, while on NASDAQ about 1.64 billion shares traded, below last year's daily average of 2.02 billion. Advancing stocks out-numbered declining ones by a ratio of about 19 to 12 on the NYSE and by 17 to 12 on NASDAQ.

We’re forecasting a relatively modest week for U.S. stocks, as the cloud of rising oil prices and higher bond yields rains on the earnings season parade that kicks off Monday. In addition to these concerns, the coming week is loaded with major economic reports released daily.

The consensus forecast for the second-quarter earnings growth rate is somewhere around 4.4%, up slightly from the first-quarter rate of 3.9%. It’s our belief that if those companies reporting earnings on Monday and Tuesday are in line with analyst estimates, than we should see the concerns about valuations, loftier Treasury yields, and the ongoing climb in the pricing of crude-oil futures dissipate into the week. However, it’s been reported elsewhere that out of 136 existing “guidance” statements from companies about their earnings, seven were warnings and two were in-line with expectations leaving 127 as “unknown.”

Our technical assessment of the markets continues to improve with Breadth and Volume indicators turning positive late last week and consequently confirming the price trends. There is the possibility that if last week’s rally carries forward into the coming week that that market could be classified as over-bought. But in our opinion an over-bought status would be more tolerable than the non-confirmative state which has been in place for the past several weeks.

As of Friday all of the Major Markets and Style Box alternatives which are analyzed by the AAS Service are viewed as Neutral. The AAS “Buy” rating only begins to surface in the sector analysis where we have five “buy” ratings, eighteen “neutral” ratings and three “sell” ratings.

As such, sectors for potential alpha generation in the coming week include: Natural Resources (IGE), Internet (IAH), Industrials (IYJ) Networking (IGN) and Telecommunications (IYZ).

Energy (Natural Resources): iShares GS Natural Resource (IGE), Oil Service HOLDRS (OIH), PowerShares Water Resources (PHO), PowerShares Dynamic Oil & Gas (PXJ), Frontier Oil Corporation (FTO), National Oil Well Varco Inc (NOV), Overseas Ship holding Group (OSG), Transocean Sedco Forex Inc (RIG), Bristow Group Inc (BRS).

Industrials: iShares Dow Jones U.S. Industrial (IYJ), PowerShares Dynamic Bldg. & Cons (PKB), PowerShares Aerospace & Defense (PPA), Vanguard Industrials (VIS), Industrial SPDR (XLI), Lindsay Manufacturing Co (LNN), Cubic Corp (CUB), Shaw Group Inc (SGR), Robbins & Meyers Inc (RBN), Cascade Corp (CAE), Fidelity Select Industrials (FCYIX), Fidelity Select Air Transportation (FSAIX), Fidelity Select Industrial Equipment (FSCGX), Fidelity Select Chemicals (FSCHX) and Fidelity Select Defense & Aerospace (FSDAX).

Internet Architecture and Networking: B2B Internet Holdrs (BHH), Internet Architecture Holdrs (IAH), iShares GS Networking (IGN), Internet Infrastructure Holdrs (IIH), PowerShares Dynamic Networking (PXQ), MIVA Inc (MIVA), Cree Research Inc (CREE), Blue Coat Systems Inc. (BCSI), NVIDIA Corp (NVDA) and Neoware Systems Inc.( NWRE).

Telecommunications: iShares DJ U.S. Telecom. (IYZ), Telecom Holdrs (TTH), Vanguard Telecom Services (VOX), Wireless Holdrs (WMH), Telephone & Data Sys (TDS), Sprint Nextel (S) and Qwest Communication International (Q).

Most of the sectors we analyze were up on Friday with the exception of the Utility and Financial sectors which are more interest-rate sensitive. Both sectors face increased competition to attract investors when bond yields are a rising.

We continue to recommend a conservative portfolio allocation 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 1814. Of those reviewed, 362 are rated "Buy," 5112 are rated "Sell" and 940 "Neutral”. While we remain conservatively bearish, our Model Fund and Stock Portfolios are allocated around 50-75% invested and 0-25% 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 50-75% cash and 25-50% long.

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

Top AAS Rated Major Market – Fidelity Nasdaq Composite (ONEQ 6/1/07)

Top AAS Rated Style-Box for Alpha – iShares Morningstar Mid Cap Growth (JKH 3/20/07)

Top AAS Rated Sector for Alpha – iShares Goldman Sachs Natural Resources (IGE 3/19/07)

Top AAS Rated Long Stocks for Alpha

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

Apple Inc. (AAPL 4/24/07)

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

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

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

Crocs Inc. (CROX 5/9/07)

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

Cummins Inc. (CMI 1/31/07)

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

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

Top AAS Rated Short Stocks for Alpha

Rogers Corp. (ROG 12/6/06)

Beazer Homes USA Inc. (BZH 1/25/07)

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

Meritage Homes Corp. (MTH 12/18/06)

RTI International Metals (RTI 5/1/07)

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