Portable Alpha Daily: 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.

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Short-Term Technical Indicators