Mousetrap 4/15/2012

Condition Bear Market Rally
S&P Target 1230
Small Portfolio IAU & XLF 12.92%
Hedge XLU 0.06%

Position Date Return Days Call
GCI 7/14/2011 13.94% 275 Hold
CSGS 10/3/2011 14.64% 194 Hold
NLY 10/25/2011 2.48% 172 Hold
DD 10/27/2011 14.73% 170 Hold
KBR 10/27/2011 16.94% 170 Hold
VG 10/27/2011 -37.99% 170 Buy
TTM 11/30/2011 66.89% 136 Hold
BT 1/4/2012 10.26% 101 Hold
PDLI 3/7/2012 0.00% 38 Hold
CLF 3/19/2012 -3.78% 26 Hold

S&P Annualized 2.13%
Small Portfolio Annualized 14.79%
Mousetrap Annualized 17.82%
Hedged Annualized 17.89%

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NOTE to new readers:

The Mousetrap portfolios exist in three versions,

1) Small Portfolio (for accounts less than 20,000 dollars) – holding two ETFs (currently IAU and XLF)
2) Mousetrap (for larger accounts) – holding ten stocks
3) Hedged (for margin accounts) – adding a short position to the Mousetrap portfolio

Each stock on the Mousetrap is designed to be held approximately a year. The ETFs may trade more often.

For each position I show the stock, the date the trade was entered, the return (which includes dividends), the days held, and the recommended buy or hold for the trade.

There is no aggressive timing in these models. The hedged position is either active or in cash depending upon whether the sector configuration is bullish or bearish. When the model began live testing at the end of May 2011, the configuration was bearish. It is now mixed and the hedge will remain in place until a confirmed bullish bias appears. Regardless of the action in the past few months, the market has only gone up 1.86% in the ten months since the test began, which is annualized to 2.13%. A 2.13% annualized gain is hardly something we should consider to be a viable bull market.

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My friend Len has maintained a short term correction forecast, and we are finally seeing some negative activity this week. The only really shocking thing is that it took this long for any negativity to hit. That said, the fact that the market is only up 1.89% since May 31, 2011 is an indication that the market is neither overbought nor oversold from a long term perspective. Short term, overbought. REALLY short term, oversold. But long term – it’s basically sitting at zero.

As skeptical as I’ve been on the way up, I’m equally cynical about it going down. This is neither a classical bull market nor a classical bear market. It’s just generically “bearish” in the sense that there’s no good reason for the market to go on an extended tear for the next few years – other than the Fed and half the other central banks on the planet tossing money into the wind like confetti in a New Year’s Eve party.

So, my models are mixed. My instincts are suspicious. And the hedged position allows me to stay out of the day to day questioning of what will happen. If the market goes up or down, I hope that my long positions will go up more, or down less, than my hedge in XLU. That’s been the case since the beginning of the year, and has given me a painless week.

Next week is a whole new ballgame.

No changes to the positions since last week. The long sector is XLF and the short sector is XLU. Since they are both technically “bear” sectors (i.e. they outperform during bear markets), my long term position is mixed – technically a “bear market rally”… which is about as ambiguous as it gets. I’d like to be more decisive, but the sectors don’t allow any bold calls either way.

Tim