The Smart Money Repositions for 2006

Technical

The S&P500 fell hard late yesterday as all of the gains from the last few sessions pulled back to the 1214 support level. A close below this level in the next few days would likely mean further declines. In that case, I would expect a change in leadership and a high level of volatility as large investors build their 2006 positions. The nasdaq composite is in better shape, although it too has fallen below its 50 day moving average. A real challenge for the tech heavy index exists if it fell below 2120.

Based on the magnitude of the sell-off I would say the smart money has begun to reposition their portfolios. The media called it "a sell off on inflation fears", I say it was 3rd quarter earnings jitters and profit taking ahead of a changing business cycle. We are cautiously optimistic however, we have started to make some changes after 10%+ gains to our Focus13 fund in September. Visit our website at www.thesmartmoneyinvestor.com to see our current positions.

Below I have listed the top and bottom five performing sectors the last two days. It looks like investors started to move to more defensive sectors as Retail, Metal and Real Estate Operations took it on the chin. Interesting enough Medical Software, Rail and Semiconductor Equipment showed good gains as well as the five below.

Top Five Performing Sectors

1. Diversified Drugs
2. Generic Drugs
3. Building Maintenance
4. Airline
5. Telecom-Fiber Optics

Bottom Five Performers

1. Computer Peripheral Equipment
2. US Oil & Gas Explorers and Production
3. Integrated Oil
4. Commercial Builders
5. Oil and Gas Drillers

• NTES - Chinese internet stocks have caught the eye of investors. Even though the nasdaq fell sharply yesterday NTES was able to hold on to 2% gains. Recently the Chinese Government announced plans to combat online gaming addition. As a result companies such as NTES have levied, what amounts to penalty points to over active gamers (gamers who play more than 3 hours at a time). By reducing the amount of "experience" points a player could earn after three hours of play Game Providers feel they will reduce over play by patrons. It has been reported that over 41% of all Chinese gamers play for 4 hours or more. Investors are waking up to the value of these stocks. We have calculated intrinsic value for NTES above $270/share and will likely add shares on a pull back. Further, the company is a component the USX China Index, which is traded on the AMEX.
• BIDU - So far investors see more value than the, "at best" $45/share value Goldman Sachs and others have put on the shares. It appears that many investors are looking beyond near term earnings growth and are betting Baidu.com will grow faster than expected. We continue to value BIDU in a line with its peers. BIDU has recently been added to the USX China Index, thus increasing demand for its narrow float.
• SNDA - Shanda Interactive Entertainment is the largest Asian Game Provider, yet a diversion between its stock price and its peers' stock price exists. The company appears to be building technical strength as it has based in the $26-$28 range for the last couple of weeks. In addition, the stock has about 3% of its shares sold short. The company continues to add new games and looks to be growing users beyond its peers with 18.5 million paying accounts. We calculate SNDA's intrinsic value at $114/share well above our 2x IV/Mrkt price rule.