Mobile App Index: 63.39 +5.01% WE 5/25/12

The downward momentum was checked this week -- the Mobile Application Index bounced and the major indices were mixed -- but overall the across-the-board rapid declines of recent weeks have slowed.  While I cannot predict exactly what will happen with the major indices next week, they may rise, it still appears that their 'bottom' has not been found yet (see below for more details as I attempt to more completely answer the question from this week).  As for the overall comparison indices, I believe that this weeks' performance of the MobiAppIndex indicates that they will begin to return to a positive trend in the next month -- but I predict that there will be another week or so of declines in the major indices before then.

P announced earnings and, as predicted, it did not disappoint -- it wildly exceeded my expectations.  MITK surprised us this week with a very strong return on no news -- maybe the 80% overall decline was an over correction?  The overall increase in the index this week was extremely broad, and indicates to me that it will return to a positive trend soon -- the only loser was NCTY.  The theory is that the MobiAppIndex will lead the major indices during the upward trend.

Winners: P +20.68%, MITK +17.82%, GLUU +14.56%, VELT +10.21%, COOL +4.52%, EPOC +2.81%, ROVI +2.4%

Losers: NCTY (6.25)%

Comparison: DJI +0.69%, Nasdaq +2.1%, S&P 500 +1.74%, EEM (0.38)%, FONE (0.33)%

Rebalancing candidates: Millenial Media (MM on NYSE) -- a new IPO, and Vringo (VRNG on AMEX) -- has gone above $2.00/share again.  More on a rebalancing update in a month or so.

To finish answering last weeks' question of "How will the markets, and therefore the Mobile Application Index, recover from the recent steep declines?" there are a couple more observations to make.  I will list them out in the form of facts/assumptions, and encourage the reader to review past postings for more details and also separately validate them.  Nobody has the complete picture when it comes to investing, but the idea is to either become educated enough about your investments to make a good decision, have some sort of "insider information" (illegal), or intelligent algorithm/technology to make the investment work.  In the case of the Mobile Application Index, the investing idea here is to utilize an algorithm that takes an ETF-like approach wherein a 'buy and hold' strategy could work.

Here is the Mobile Application Index algorithm (it is very simple):
1) Rebalance the index at least once a year -- preferrably once every six months at least (after an earnings period.)
2) Current weightings are: 40% of the index dedicated to 'unique' application stocks, 30% to gaming and entertainment, and 30% to marketing stocks,
3) Select only stocks that can clearly demonstrate a key component of their business strategy depends upon the mobile application space (software not hardware) -- smartphones and tablets -- whose current price per share is greater than or equal to $2.00 USD.  NOTE: my preference is to utilize only shares that trade over NYSE, AMEX or Nasdaq, but that is not a hard requirement.

Disclosure: I currently hold positions in every stock in the index except three in the gaming and entertainment category: ROVI, NCTY and COOL.  My sense on this has been that gaming is 'over invested' relative to the rest of the index -- many companies in the gaming industry are not publicly traded -- and the likelihood of a strong success is therefore more limited. I also try to 'time' my purchases in an opportunistic way, rather than do wholesale buying and selling when I 'rebalance' the portfolio.  Example: I bought more MITK earlier in the week.

As for how will the MobiApp and major indices rebound, here is my list:
1) The smartphone market is very large and growing -- a 47% year on year growth so far in 2012.  You can easily find articles on this:
http://mobithinking.com/mobile-marketing-tools/latest-mobile-stats
http://www.siliconrepublic.com/digital-life/item/27255-mobile-phone-sales-decline/
2) The tablet market is "on fire" -- 124% year on year growth so far in 2012
http://www.siliconrepublic.com/digital-life/item/27255-mobile-phone-sales-decline/
3) The overall major indices are still in recovery mode from 2008
4) The mobile applications that consumers use actually define the value of the smartphone and the tablet for them
5) While the individual stocks vary in their revenue growth rates, in general those rates move as a function of the overall smartphone and tablet market.  In short, the market itself is growing very fast and in order for a company to maintain its' foothold (retain or grow marketshare) they must continually invest rapidly in product innovations, people resources, infrastructure and marketing and sales.  This "mach 2 with your hair on fire" situation becomes the key to both the investment opportunity and the stressful anguish that we're seeing -- the investment community wants profitable companies and we're in an investment climate where 'taking profit on volatility' has become a critical investment strategy for many hedge funds.  We cannot expect many of these companies to be profitable at this point in the markets' lifecycle -- to do so could become the reason for slowed growth.

So how does the MobiAppIndex 'return' to last years levels and go beyond that?  With each successive earnings report, these companies need to continue to demonstrate:
1) their markets are growing and they are maintaining their marketshare or their marketshare is growing
2) their revenues are growing in kind with the overall smartphone and tablet growth -- or there are serious and credible plans to get there
3) ideally they should show that their losses are consistently declining and there is a 'light at the end of the tunnel' for profitability.
As for the major indices, I have no idea what will fix those problems -- I just use them as a relative comparison -- but I think it still has something to do with the politics behind the 'credit default swap' crisis of 2008.