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Sunday, July 01, 2007

Alpha and the Week Ahead

The coming week, although shortened by the July 4th holiday, will continue to be fueled by various economic reports scheduled for release. Starting with Monday’s Institute of Supply Management report, followed by Tuesday’s release of the Commerce Department's factory orders report for May and Friday's monthly jobs report from the Labor Department, sentiment and volatility will likely be directly related to the release of these economic indicators. Furthermore, attention will be focused on the terrorist activities taking place over the last few days both in London and Glasgow, which will obviously make holiday travel difficult and stressful.

That being said we believe that the U.S. markets will move slightly higher in the coming week just as they did last week. We expect the economic reports to support the view that the economy, although slowing, is healthy and that inflation remains within the appropriate levels. However, geopolitical concerns combined with worries over tightening liquidity and the shaky sub-prime mortgage market (which may translate into additional hedge fund collapses) will dampen investor exuberance. Furthermore, lower trading volumes throughout the week will exaggerate market volatility.

In our opinion market breadth was moderately negative. Advancers took a 17 to 16 edge over decliners on the NYSE but lagged by a 13 to 16 ratio on the NASDAQ. The majority of trading volume was on the downside both at the NYSE and the NASDAQ. It’s obvious that the major indexes have stalled since making record or multi-year highs in the beginning of June.

As we mentioned previously, the technical indicators we analyze are showing negative divergences from the index prices and have been do so since mid-May. Rising equity prices without confirmation by the technical indicators is not a comforting environment for stocks over the short-term.

On the sector basis, higher oil prices helped the energy and materials sectors move higher while the financial services sector moved lower as fears brewed over the Bear Stern’s hedge fund collapse. As mentioned above, worries about a pending “credit crunch” and its impact not only on consumer lending but more importantly on corporate borrowing will persist into the weeks ahead.

At this time there are no AAS Major Markets or Style Boxes carrying a ”Buy” rating. However, we are observing alpha generation on a sector basis with Internet (IAH), U. S. Technology (IYM), Global Technology (IXN) and Networking (IGN) sectors all carrying “Buy” rating.

Using a top-down approach, those seeking an opportunity to add alpha might benefit by looking deeper into the above sectors or by doing additional research into the following:

Technology: Novatel Wireless Inc. (NVTL), Blue Coat Sys Inc. (BCSI), NVIDIA Corp (NVDA), BankRate Inc (RATE), Synaptics Inc (SYNA), Commscope Inc (CTV), Apple Computers Inc (AAPL), Google Inc (GOOG), Factset Research Sys Inc (FDS), SPSS Inc (SPSS), PowerShares Dynamic Hdwr. & Elect. (PHW), Technology SPDR (XLK), Vanguard Information Technology (VGT), iShares DJ U.S. Technology (IYW), iShares Goldman Sachs Technology (IGM), Morgan Stanley Technology (MTK), B2B Internet HLDRS (BHH), Internet Infrastructure Holdrs (IIH), iShares GS Networking (IGN), iShares S&P Global Technology (IXN), Internet Architecture Holdrs (IAH), Fidelity Select Computers (FDCPX), Fidelity Select IT Services (FBSOX), Fidelity Select Network & Infrastructure (FNINX), ProFund UltraSector Telecom. (TCPIX), ProFund Ultra Sector Technology (TEPIX), Rydex Internet (RYIIX), Rydex Telecommunications (RYMIX) and Rydex Technology (RYTIX).

Industrials: Lindsay Manufacturing Co (LNN), Cascade Corp (CAE), Shaw Group Inc (SGR), Cummins Inc (CMI), Ceradyne Inc. (Calf) (CRDN), Kennametal Inc (KMT), Robbins & Meyers Inc (RBN), Spx Corporation (SPW), Precision Castparts Corp (PCP), Flour Corp (FLR), Industrial SPDR (XLI), PowerShares Aerospace & Defense (PPA) and Vanguard Industrials (VIS).

Energy / Natural Resources: Frontier Oil Corporation (FTO), National Oilwell Varco Inc (NOV), Transocean Sedco Forex Inc (RIG), Overseas Shipholding Grp (OSG), Occidental Petroleum (OXY), El Paso Corp (EP), Stone Energy Corp (SGY), Williams Cos Inc (WMB), ConocoPhillips (COP), Valmont Industries (VMI), Idex Corp (IEX), PowerShares Water Resources (PHO), PowerShares Dynamic Oil & Gas (PXJ), Oil Service Holdrs (OIH) and Fidelity Select Energy Service (FSESX).

We 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, 279 are rated "Buy," 815 are rated "Sell" and 727 "Neutral”. While we remain conservatively bearish, our Model Fund and Stock Portfolios are allocated around 25-50% invested and 50-75% 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 50-75% 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 – Internet Architecture HOLDRs (IAH 5/1/07)

Top AAS Rated Long Stocks for Alpha

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

Martin Marietta Materials (MLM 11/6/06)

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

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

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

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

Apple Inc. (AAPL 4/24/07)

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

Cummins Inc. (CMI 1/31/07)

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

Top AAS Rated Short Stocks for Alpha

RTI International Metals (RTI 5/1/07)

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

Rogers Corp. (ROG 12/6/06)

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

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

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

1 Comments:

  • I saw your technology includes SPSS... what about Market Tools? Their stocks fell 45% today.

    By Anonymous Erik, at 1:13 PM  

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