Portable Alpha Daily

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Sunday, August 12, 2007

Alpha and the Week Ahead

Equities, which were in negative territory for most of Friday’s session, moved higher in late trading after news of the Fed’s third liquidity injection of the day. Although the fundamental impact of increased liquidity will likely be minimal, the psychological impact might prove sufficient and calm fears of a liquidity crisis. It’s painfully obvious that Chairman Bernanke is less trigger-happy than Greenspan, and hopes of a “Greenspan Put” are falling by the wayside. With central bankers throughout the world injecting liquidity into the market, its certain that re-pricing risk and minimizing volatility are of utmost importance.

However despite the modest gains for the week, the technical conditions of the market show no signs of improvement. Market internals continue to deteriorate, although at a slower rate. Volatility continues to intensify. Breadth was negative with both advancing/declining issues and up/down volume favoring the downside. The ten major sectors were equally split for the session with the Oil and Gas sectors showing leadership while Telecom and Utilities lagged. Bearish sentiment will likely escalate, especially if the triple digit rallies and breakdowns continue on a daily basis. In our opinion, it’s unlikely that we’ve reached a market bottom at this juncture.

Next week, in addition to being an option expiration week which tends to bring about a positive investor sentiment, many key economic reports are scheduled for release. The most important include Core CPI, Industrial Production, Capacity Utilization and Initial Jobless Claims. In our opinion the flight from equities on Friday reflects the collective fear that financial events -- the seizing up of credit markets, hedge-fund failures and such -- are fast developing into economic issues.

Our Major Market Model remains Bearish as of May 15th 2007. Both the Technical and Sentiment components are firmly bearish, while the Trend component maintains its bullish stature. However, if the S&P 500 closes below 1397 expect the Trend component to turn bearish as well. The total universe of stocks, ETF’s and mutual funds which we review on a daily basis is 1795. Of those reviewed, 185 are rated "Buy," 902 are rated "Sell" and 708 "Neutral.” We continue to recommend a defensive portfolio allocation in line with the recommendation of the AAS Market Model. The AAS Model Fund portfolios consist of 50% cash while the AAS Model Stock portfolio is now 100% in cash.

Short-Term Technical Indicators

Investor Sentiment

Long-Term Market Model – Bearish since May 15, 2007

Asset Allocation Recommendation – AAS Model Portfolios are allocated between 50-100% cash

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 5/29/07)

Top AAS Rated Sector for Alpha – Internet Architecture HOLDRs (IAH 5/1/07)

Top AAS Rated Long Stocks for Alpha

Intuitive Surgical Inc. (ISRG 2/22/07)

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

CME Group Inc. (CME 7/30/07)

Oceaneering International (OII 3/19/07)

Astec Industries Inc. (ASTE 7/18/07)

Itron Inc. (ITRI 7/12/07)

Valmont Industries Inc. (VMI 5/22/07)

FMC Technologies Inc. (FTI 3/7/07)

Jacobs Engineering Group Inc. (JEC 1/23/07)

Varian Semiconductor (VSEA 8/10/07)

Top AAS Rated Short Stocks for Alpha

Radian Group Inc. (RDN 6/7/07)

CPI Corp. (CPY 7/20/07)

LandAmerica Financial Group (LFG 7/11/07)

U.S. Steel Corp. (X 7/20/07)

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

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


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