Portable Alpha Daily

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Sunday, July 22, 2007

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 29th 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


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