OUTLOOK

"Bearish on Airlines (XAL Index)"

1/5/2007

Fasten your seatbelts.  We believe the XAL (Airline Index) will decline at least 5% from its recent high of 61.74 on 1/4/07.  We believe this correction will take place within the next 4 weeks.

Our system is indicating extremes in bullish sentiment and overbought readings on the XAL  (Airline Index).  Correspondingly, we have taken a short position in IYT at 83.24 on 1/5/07. Given the lack of pure plays on the XAL Index other than the XAL options and underlying stocks, we chose IYT as our vehicle of choice, an ETF that tracks the transportation sector.

Mark Yuan, CFA