Behind the Market Headline News

Today's AAII (American Association of Individual Investors) bull and bear sentiment index are just another statistics that paint the bleak mood of markets. The Bears were over 70, an all time high level since the survey started 7/87, and the Bulls barely registered at 19, also a muti-year low. The difference between Bulls and Bears, a commonly used contrarian indicator based AAII survey, dropped below -50 (see the bottom panel of the chart), it only happened once in early October, 1990. Is the market bottom finally here? The bull-bear contrarian indicator has worked quite amiable in the past. If all the bulls have thrown in the white towels, we just might be at the bottom NOW.

The broad market valuation, measured by trailing P/E of S&P500 index, for the first time since 1/1985 dropped below 10x today according to Bloomberg (see chart below; red line - P/E, yellow - price/book, green - price/sales and white - SP500). It looks like this negative momentum created by economic uncertainties and extreme risk reversion are still the dominate sentiments. We might be heading to 7-8x multiple soon. Talking about about insane and efficient markets!

BlackBerry device maker, RIM, report its the 3rd quarter results after the bell, as expected, the company's earnings were significantly impeded by the global economy slow down, GAAP net income increased about 7.0% from $370mm to $396mm ($0.70 vs $0.66 per share) with revenue coming in at $2.8 billions. Most interesting to me in the earning release, though, was that RIMM sold 6.7 million BlackBerry devices and booked $2.3 billion revenue. For comparison, in AAPL last quarter (ended 9/27/08), AAPL sold 6.9 million iPhone, but only $806 millions revenue was recognized. So even about 200,000 more iPhone were sold with assumed higher ASP than Blackberries in three month period, AAPL booked 2/3 less revenue than RIMM. The culprit is that AAPL book its iPhone sales using so-called "subscription accounting", namely recognized revenue over 24 month period, but not as sales occur. When AAPL only sold average about 1 mm iPhone in each previous few quarters, iPhone sales have limited...

According to latest Q2 SEC 13F filings, institutional investors (hedge funds, pension funds and endowments and banks) increased their positions in 4 out of 10 S&P economic sectors, namely energy, material, information technology and utilities. Most notably, the 3.0% energy sector incremental increase over the 1st quarter, and significantly underweight in financial and consumer discretionary (see the chart "% weighting changes from 1st Q" on the right panel.) The dramatic market sell-off we experienced lately, especially last two sessions, caught many people by surprise, especially the pounding on technology sector and small cap sectors. If we compare the institutional investors' holdings and sector performance, we would not have much difficulties to find that current market behavior may be largely driven by the asset allocations and "locking-in" gain on the 1st half's best performers, namely energy, materials and technology. As the chart on the left show...

In my previous post on Q2 SEC quarterly filings from a limited numbers (182) of available hedge funds, we noticed that hedge funds had significantly over-weighted energy and material sectors, two of best performing groups among the 10 S&P sectors. It might be purely coincidental but we can not help to ponder the implications for these two tumbling sectors. As today (8/27), almost 1000 hedge funds filed their last quarter's 13F based according to Bloomberg . The screen below from Bloomberg shows that hedge funds as a group places their biggest bets on energy as we discussed previously. Considering the short term natural of their holdings, it should not surprising many that the unwinding process of energy names will continue in the current quarter. We probably won't see much improvement until the end of next month when the "window dressing" is finally over.

Speculators maintained a net long position of 11,659 crude futures contracts at NYMEX markets according to this Friday's CFTC release, ended three consecutive weeks net short positions since 7/22 (see the first chart below, green circle). Considering the CFTC data were as market closed on Tuesday (8/18), one day early than $11 plus up and down movements on Thursday and Friday, if there are any indications, it certainly points to more turbulence ahead. Popular media stories attributed the $5 gain and $6 loss of light sweet crude price on Thursday and Friday to dollar and geopolitical factors (Georgia, Russian conflicts and cold war rhetoric ), and thin volumes could also exacerbate magnitude of pricing movement. Dollars and geopolitical tensions have been part of equations that drive crude prices, but the relationships may be in a non-linear fashion and much more complex than headline news indicates. The Georgia and Russian conflicts began two weeks ago, crude price did not show ...

There were 182 hedge fund managers filed form 13F with SEC as Thursday (8/7/08) for Q2 according to Bloomberg. On aggregate level, one of striking similarities among hedge funds were heavy overweight on energy sector comparing to S&P. There were no surprises that hedge funds also significantly underweighted financial and consumer sectors in the second quarter, and maintained neutral stands among other major sectors. Was the 4% overweight on energy sector a major driver of 20% sector gain (based on XLE) during the 3 month period? If it was not the ANSWER, there was no questions that gorging of energy names by the deep pocket hedge funds were one of forces contributing to one of dramatic energy bull run until the end of second quarter. We are looking at the rear mirror of hedge fund manager actions, but today's energy related commodities wreck probably won't end soon considering many hedge funds might continue their unwinding energy positions and asset class re-allocations.

AAPL delivered another great quarter after market closing yesterday (7/21) , beating both EPS and revenue street estimates ($1.19 and $7.46 billion vs. $1.08 and $7.37 billion.) The stock took a beating after AAPL failed the Wall Street's expectations in gross margin and EPS for the coming Q4 and concerning of Steve Jobs's health. It is well known and perceived for many on the street that AAPL has traditionally provided very conservative guidance for coming quarters so that the management have some insurances to delivery positive surprise when it is time reporting earning. I believe there is significant truth about the practice and it is common for some market participants to use the tactics to spin the lack luster business operation into positive light. For long term (>1 year) investors, however, what AAPL did may prove to be a responsible management strategy. Considering the fact that AAPL has continuously developed some amazing new products distinguished them with "c...

I made an argument that the S&P500 may have reached the bottom in previous post ( 7/13 ) by using speculator's net S&P500 index futures and options as a proxy. The speculators have build up their long positions for last three weeks and most importantly that the net long positions increased incrementally from closing short position and increasing long positions. There are two other market sentiment indices also point to the possible S&P500 bottom in the near term. The first measure is the ratio of numbers of stock reaching 52 week high to 52 week low for the total US markets (52 HL ratio, thereafter) calculated from Bloomberg database (the data is available beginning on 10/25/02). Using the last 5+ years data, the 52 HL ratio is a very good contrarian market indicator (See chart below). For all the market corrections we have experienced during the study period, the 52 HL ratio exhibited as an almost perfect turnaround indicator. Whenever the ratio reading was close ...

The dramatic equity pricing gyrations, the spike of VIX (briefly broke 30 intraday on 7/15) and heavy trading volumes on Friday just might be the early signs that the market is inching closer and closer to the near term bottom, if not the bottom, many have been waiting for or expecting in the last few months. If there is any bright spot in this seemingly dismal markets from a contrarian perspective, then looking no further than the equity futures markets. Even the market looks and feels horrific, the smart money has significantly reduced the bets on declining S&P500. This Thursday's (7/10) release of the exchange short interests shows that short sales on both NYSE and NASD declined in the late June. And most importantly in the futures market, the non-commercial users, or so-called speculators, have significantly increased their wagers on the S&P 500 turn around, at least in the near term. The speculators have maintained net long positions on S&P500 index since 6/24...