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Sunday, July 15, 2007

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

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