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Sunday, July 08, 2007

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

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