Monday, July 25, 2011

External Publications - 7/25/2011

One article is published on SeekingAlpha today.
  • Long Energy, Short Financial ETFs Play: Readers of my ETF ranking articles should know that I’ve been advocating a simple long energy (XLE)/short financials (XLF) strategy since May. The strategy returned a combined 5% since inception while the market, represented by S&P 500 (SPY), registered a -1% return...

Friday, July 22, 2011

Institutions, Dumb Money, and Day Traders

Bespoke opined that the recent rally was driven by dumb money because the market moved higher in the first hour but lost steam in the last hour. I think Bespoke's reasoning is flawed. It forgot to account for the day traders, who trade for very short term and drive the market up and down by enormous amount of liquidity. Dumb money, or individual investors, is the most vulnerable under day traders' attack. I'd imagine that day traders will take the other side of dumb money and because day traders are more sophisticated and powerful, market will move against dumb money's intention. So if we see the market surges in morning, probably it is day traders that move the market up, trying to squeeze dumb money who's selling.

And it is normal that in the last hour the market moves in the opposite direction from that of the first hour, simply because day traders always close all positions - which they opened in the morning - before the market closes.

All in all, dumb money is not supposed to move the market, they are supposed to hold the bags after the market is moved.

Monday, July 18, 2011

External Publications - 7/18/2011

One article is published on SeekingAlpha today.

Impression, Earnings Reports

It is one weeks into the earnings season and we have developed an impression that the economy is growing. But there is another crucial factor that will negatively impact the trajectory of the market, the Europe debt issue.

We focus our discussion on financials sector and energy sector, as we are long XLE and short XLF based on our ETF ranking system. There are a couple of high profile earnings reports from these two sectors, JPMorgan Chase last Thursday, Citigroup last Friday, and Halliburton today. The numbers are rosy: all of them beat EPS and revenue expectations. Moreover, both JPMorgan Chase and Citigroup’s business loans grew in the past three months ended in June. And Halliburton eyed surging demand and growing margins. All the facts point to a more active economy and GDP growth, and a higher price level of the stock market.

Nonetheless, banks are still under pressure in an unfriendly macro economic environment. Their stock prices moved lower in face of new unfavorable regulation policies, litigation costs, and low interest rates.

The most critical issue is the Europe debt issue. It is reported this morning that “Debt Anxiety Pushes Financials Down as Bank of America, Goldman Hit Lows”. Although the Europe debt issue is already aged in years, it appeared that there is still no convincing solution. The direction of the stock market will be determined by the outcome of the duel between a growth U.S. economy and a deteriorating Europe debt issue.

Saturday, July 16, 2011

Sector Rank Spread Potential Downtrend

The Sector Rank Spread moved lower last week and now it's in a potential downtrend. It appears that last week's price action consumed some tendency of sector rotation. Nonetheless, fluctuations are normal in an earnings season, and I wouldn't read too much into it as for now.

Friday, July 15, 2011

Gossip on Sector ETF Rankings - July 15, 2011

It appeared that our long XLE / short XLF strategy successfully hedged a volatile first week into the earnings seasons. For the week, S&P 500 (SPY) fell 2%, XLE was flat, and XLF fell 4%. Investors who would end up with a 4% gain even when the market was falling. Our prediction was based on the predictive power of our ETF ranking system, which is a novel fundamental approach that drives short term return.

Thursday, July 14, 2011

Big Money Index Will Be Manually Updated Everyday After Market Close

The Google spreadsheet is not working well recently and dynamic data couldn't be updated for the Big Money Index. I have to change it back to manual mode. Data will be updated everyday after market close. Sorry for the inconvenience.

Tuesday, July 12, 2011

Valuable Analyses from a Reader and a Fundamental-Weight Cloud Computing Portfolio

Poppedcollar, one of my readers on SeekingAlpha posted excellent comments to my latest article: "The Growth Perspective of the First Trust ISE Cloud Computing Index Fund, SKYY". He gave insightful analyses on the prospect of cloud computing and a couple of selected companies. I'd like to copy them over.
Personally, I think MSFT, GOOG, INTC, WDC and STX all provide very safe exposure to a bullish cloud computing environment. WDC and STX may seem like a bit of a stretch but I seriously doubt any company would run a cloud with SSD. It's too expensive and too unstable. Regardless, I see WDC and STX being undervalued in any environment that will arise. Desktop PC's are far from dead and will remain a staple of personal and business computing. Tablets and smartphones are just an addon.

MSFT is another company I see being profitable from any angle. Software is always useful and Microsoft dominants from this angle. Windows sales may drop (though this is due to PCs being upgraded less frequently, not that PCs are being less frequently used) but I think Microsoft will easily cover this in other areas including cloud computing.

Google also follows the same reasoning as Microsoft with some added speculative hope for social networking. Honestly, I've been tinkering in the Google+ beta and its fairly lackluster right now but a few easy fixes and it could be significantly better than Facebook. Google (unlike Facebook) might also have some opportunity to monetize social networking by being able to draw for information about consumers. Facebook has...well a profile. Google has gmail and Youtube accounts. Youtube finds recommended videos that fit things you watch. This produces good demographics for someone posting an ad and as such, ads on Google+ will have much better targetting ability and generate a justifiably higher price tag.

Intel simply dominates the processor market and I foresee it also doing well in other forms of computing (particularly clouds). They are the best of the best in servers and any gaming oriented machine.

I'd play the software/supply angle which also captures other markets. I think it also captures the market better than a business that offers a service that may or may not be related to cloud computing (IE If it can be run off a normal network, it really isn't cloud computing).
And below is my reply:
I've checked my ranking system for the ranks of those companies. The ranks are listed below. It appeared that MSFT, INTC, and WDC are good value pick as for now.
  • MSFT - 81.95
  • GOOG - 57.05
  • INTC - 86.70
  • WDC - 79.11
  • STX - 73.65
Actually another idea popped up while I'm writing this. We can create a fundamental-weight portfolio. The idea is buy low sell high. A company with higher rank is supposed to be "cheaper" than that with lower rank. So we want to load up more. The average rank of the market is 50. So the weight should be proportional to a company's rank minus 50. If its rank is less than 50, then it is expected to underperform the market and there is no reason to hold it.

Thus the weight of each company should be
  • MSFT - 24.87%
  • GOOG - 5.49%
  • INTC - 28.57%
  • WDC - 22.66%
  • STX - 18.41%
The rank is updated each week (because price change will affect valuation and thus the ranks). So it's better we rebalance this portfolio each week. The concern is trading cost, which can be reduced by a longer rebalance period.

Monday, July 11, 2011

Gossip on Sector ETF Rankings - July 11, 2011

S&P 500 (SPY) fell 1.8% today in face of ugly news erupted this weekend. XLF fell 2.7% and XLE fell 2.4%. Thus our long XLE / short XLF strategy still returned a combined positive 0.3% when the market collapsed. It appears to be an effective strategy to protect from downside risks.

External Publications - 7/11/2011

Two articles are published on SeekingAlpha today:
  • Moving Into Earnings Season: Staying Long Energy, Short Financials: Alcoa (AA) will report earnings this Monday and unofficially kick off the earnings season. New earnings numbers will prove or disprove investment theses, and the market will see more fluctuations as investors punish losers and applaud winners. Sometimes the market moves drastically in face of any “surprises”, and it is highly recommended that investors have their portfolio protected from downside risks...
  • The Growth Perspective of the First Trust ISE Cloud Computing Index Fund, SKYY: Last week the debut of the First Trust ISE Cloud Computing Index Fund (SKYY) – the first of its kind – attracted a lot of buzz in the media. It also received many critiques from analysts and investors...
There were interesting discussions for the first one and I'd like to recapture some key points I've made:
Personally I think copper is a better macro indicator than crude oil. It is said that copper has a Ph.D. in economy. Recently copper was very strong on the chart, much stronger than crude oil. That should say something about macro economic trend, at least investors' / traders' collective expectations about it.

Secondly, in my opinion China is the engine of global economic growth, not U.S. I think copper and energy are hot because China is one of the biggest consumers of these two vital resources.

Thirdly, the recommendation was not based only on macro views. Otherwise I'd recommend XLB instead of XLE. A hot product does not automatically make its producers rich, let alone its investors. An important part of the story is how effectively the industry translate products into cash flow. According to our ETF ranking system, energy sector is the best among its peers as for now.

[T]his article was composed 36 hours ago. At that time the debt ceiling talk didn't fall apart and there wasn't yet another earth quake in Japan, as least I wasn't aware of. That's one sad thing about financial markets - nobody can foresee the future. What investors can do is to come up with good strategies to profit from the upside and, at the same time, to protect against the downside.

One thing I've learnt from my experiences is to underweight news and overweight numbers. Debt ceiling talk fell apart but they will resume the talk sometime later. Japan earth quake will have negative impact but investors will, quite legitimately, start to think about the "pent up" demand for reconstruction. That's the nature of human beings, and that's the driver of zigzags of the market. Actually there was an article about this: "Why I Don't Watch CNBC".

China's growth is driven by the demand from U.S., at least it was true in the past. China is the producer and U.S. is the consumer.

But there are subtle changes already.

U.S. is not the largest trading partner of China. Europe is the largest trading partner of China as for now.

China has a large population, it would be a much bigger consumer if their demand is unleashed. As an early sign, China's trading with other Asian countries, most of them are poorer south east Asian countries, is constantly increasing in past years, and in those trades, China is playing as the consumer and the other countries are playing as the producers.

Nonetheless the China - U.S. grand cycle is still working. But I think it's not to the benefit of either country to stick on to it.

Sunday, July 10, 2011

Companies Are Optimistic About Their Earnings

In this week's issue of Barron's, Shirley A. Lazo contributed a piece on the sunny outlook of dividends growth. The article reported that, according to S&P's senior index analyst Howard Silverblatt, dividend investors would see dividends rising 11.1% in the first half of 2011. More importantly,
He noted, too, that enrichments are commitments not just to current payments but to coming obligations. So it looks as if companies are optimistic about their earnings and cash flow down the road.
This is encouraging as we are about to enter the earnings season. We will see rosy numbers if the rising dividends correctly reflected companies' confidence towards the economy.

Saturday, July 9, 2011

Sector Rank Spread Fluctuates Ahead of Earnings Season

The Sector Rank Spread edged up slightly ahead of the earnings season, which will be unofficially kicked off by Alcoa's earnings report (AA) the coming Monday. Fluctuation is normal during an earnings season as new fundamental data enter the ranking system. In the past four weeks, the SRS was contained in a narrow band. We think that this week's slight change is not significant. We'll have a stable outlook after the earnings season.

Friday, July 8, 2011

Gossip on Sector ETF Rankings - July 8, 2011

If the market close here, the S&P 500 would be flat compared to last weeks close. But our long XLE / short XLF strategy would return a combined more than 2% in one week. Just want to reiterate the following key points
  • It is necessary to have a protection when economic outlook is not clear
  • Although XLF led the snap back, it would underperform because financials' dire financial strength
  • Despite a falling oil price, XLE will rise if economy recovers.

Employment Is a Lagging Indicator

The ugly employment number is out and the market collapses. A good story for financial media but not necessarily a logical reaction for investors. That is because employment is a lagging indicator. A lagging indicator can confirm an economic trend, but cannot signal the beginning of a new one. Indeed, while employment is still struggling, retailers started to see growth already. The ugly employment number simply says that we are still around an inflection point of the macro trend. I'd overweight retail numbers, for now.

Thursday, July 7, 2011

SKYY Will Be a Market Performer

The new cloud computing ETF SKYY is hot in media these days. Still its viability is questioned by some prestige investors. Indeed, according to our ETF ranking system, it will be a market performer despite all the buzz surrounding it.

The weight and rank of each stock in the portfolio is listed in the table above. Summing everything up, the rank of SKYY is 54.42, meaning in aggregation, SKYY is better than only 54% of stocks in the market. The rank put it at a level pretty much the same with the entire market in average. Based on the predictive power of our ETF ranking system, it is likely a market performer.

We also compared its theoretical performance to our cloud computing portfolio. Since June 13th, the inception date of our cloud computing portfolio, our portfolio rose 16%, while SKYY would have risen 10% if it was created on June 13th. Nonetheless SKYY's performance is better than the 5% return of S&P 500.

As Dana Blankenhorn figured, investors can find the best cloud computing stocks on their own.

Tuesday, July 5, 2011

Google Page Ranks of Financial Blogs

I list below the Google page ranks of some financial blogs. By no means this is a complete list of financial blogs. Neither do the page ranks speak anything about the quality of the blogs. Just for fun.

The Coming Earnings Season Will Determine Market Direction

A recent post on provided a nice summary of the current market valuation:
  1. P/E (TTM) – Fairly Valued 15.0
  2. P/E 10 year – Extremely overvalued 23.67
  3. P/BV – xtremely overvalued - 3.68 (using numbers discussed above from April)
  4. Dividend Yield – Indeterminate/ overvalued 1.72
  5. Market value relative to GDP – Moderately Overvalued 97.1
  6. Tobins Q – Extremely overvalued 1.19
  7. AAII Sentiment – Average
My takeaways are
  • 1 & 5 indicate that the valuation is supported by growth expectation
  • 7 signals that investors are not euphoria about their growth expectation
  • 2, 3, & 6 simply mean that inflation is looming
Thus the coming earnings season is highly important because market valuation is supported by growth expectation. If corporate earnings can keep the current pace, i.e., FPE = PE, then the market is fairly valued and will be range bounded after it. If corporate earnings will fall or rise, so will the market.

It is healthy that investors' sentiment is at average level right before the earnings season. It appears that investors didn't commit to a big bet yet, meaning the market may not move drastically if there is any surprise.

Saturday, July 2, 2011

Sector Rank Spread Moves Lower

The Sector Rank Spread moved lower last week. Although the earnings season does not officially start, many companies already reported earnings or will soon report it. As new fundamental data entering the ranking system, we are expecting to see fluctuations of the ranks and the SRS. At this point I wouldn't jump to any conclusion. Still a shrinking SRS reduces the tendency of sector rotation and add less fuel to the rally. As always, cautions are suggested.