Portable Alpha Daily: Mid-Week Alpha

Trepidation defined the markets again yesterday, driving down all the major indexes into negative territory. A Merrill Lynch downgrade of Countrywide Financial Corp. (CFC) led to speculation of possible bankruptcy for one of the nations biggest mortgage lenders, which in turn facilitated the sell-off. It’s a stock “pickers” market with stability absent and no signs of a fundamental base. Over the past twenty years, from October 1987 through today, there have been five noteworthy market dislocations. These corrections ranged from -14.05% in 2003 to a decline of -33.51% in 1987. Typically the phases lasted around 106 days with an average high-to-low correction of about -24%. This year’s correction is but an infant, being roughly 26 days old and down approximately -9.43% from the high. Irrespective of credit woes, economic reports, hedge fund failures or liquidity injections, it’s our opinion that this market will experience further declines before the storm passes.

However, that’s not to say investors should tuck tail and run, as there are opportunities for alpha present. We continue to recommend caution and discretion in portfolio allocations, thoughtful selection of entry points and disciplined stop loss limits. Perhaps even more appropriate would be utilizing long / short strategies, correlated and non-correlated pairs trading or inverse mutual funds and ETF’s, which can be used to hedge long market exposure. Both the AAS Model ProFund and Rydex portfolio have been 50% allocated among inverse funds for the last several weeks, with one-month returns for those portfolios at 3.41% and 1.04% respectively versus -9.39% for the S&P 500.

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Short-Term Technical Indicators