08/12/2012 Mousetrap

Small Portfolio XLF & IAU 10.95%

Position Date Return Days
VG 10/27/2011 -35.87% 289
BT 1/4/2012 13.03% 220
SAI 5/30/2012 10.12% 73
XEC 6/5/2012 24.90% 67
DECK 6/15/2012 -6.27% 57
CVX 7/5/2012 5.76% 37
RIMM 7/16/2012 14.34% 26
UEIC 7/30/2012 17.92% 12
QSII 8/6/2012 6.86% 5
CECO 8/9/2012 -4.05% 2

S&P Annualized 3.76%
Small Portfolio Annualized 9.13%
Large Portfolio Annualized 18.41%

from: [url]http://market-mousetrap.blogspot.com/2012/08/08122012-way-way-way-too-much.html[/url]
A lot happened last week that wasn’t in the news.
There was a great deal of money-flow shifting between the industry groups. Rather than rotate one stock around the end of next week, I had to rotate two last week.
So, what’s left?
Well, if I were sitting on 100% cash, here’s what I would buy on Monday per the model:
Ticker Symbol Industry
CAJ ELECFGN
DECK SHOE
QSII HLTHSYS
CECO EDUC
CHFC BANKMID
NSC RAILROAD
SEAC ENTECH
TEF TELUTIL
FCX MINING
CVX OILINTEG

We are already holding 4 of these on the model, and we held FCX a few weeks ago for a quick 9.96% profit in only 10 days. If I could do that all the time I’d be living on a beach somewhere.
In any case, what do these industries tell us? Why THESE industries?
When you look at them, they’re a mixed bag. ELECFGN, early bull; SHOE, mid bull; HLTHSYS, mid bear; EDUC, early bear; BANKMID, late bear; RAILROAD, early bull; TELUTIL, mid bull; MINING, mid bull; OILINTEG, late bull.
Right, there’s no consensus there at all. CVX, FCX, and NSC could give a bullish inflation case, and CECO is in the target industry for the next Fed liquidity bubble (at least, as Zero Hedge sees it).
And that might just be what happens: another Fed bubble.
But the CONTEXT for such a bubble looks like 52 card pickup. Everything is scrambled, and throwing more money into the mix will just scramble it even further. At some point the imbalances will be more than Bernanke can deal with.
And there’s also the question of whether Bernanke will do anything at all, or when.
I get one message from the money-flow, and it ain’t pretty. There isn’t a lot of strategic investment going on out there. It’s just a bunch of speculation.
Beware the speculation.
In 2003 my apartments were being converted to condominiums. It was a crappy place with paper thin walls and I knew EXACTLY when the couple downstairs were having sex. I felt sorry for the poor woman, because he just snored immediately afterward…
In any case… we had to move out or buy, and I didn’t want to pay 300,000 for a two bedroom place with paper thin walls.
One of my neighbors was eager to buy, though. So I asked him why. It wasn’t WORTH 300,000. He just smiled and answered that it was worth 300,000 now because someone would pay him more for it later.
Here’s the difference between speculation and investment: an investment is something that you buy based on what it’s worth TO YOU; speculation is something that you buy based on what you THINK someone ELSE will pay for it.
You can still TRADE investments, but it’s always a good idea to trade INVESTMENTS rather than speculations. A stock has value because of the company behind it. The price fluctuates around that value based on speculation – but it eventually comes back to value.
The industry configuration my model is seeing is that of an economy running on speculation.
I hate to say it, but we almost NEED a bear market to get things back into a business context, rather than just running after the next fix the Fed may or may not be offering in its methadone clinic today.
Oh, and on top of it all, there are those HFTs I keep complaining about:
[url]http://www.fool.com/investing/general/2012/08/10/the-terrifying-graphic-that-shows-stock-trading-r.aspx[/url]
Nice, scary graphic there.
No, I’m not timing the market. I don’t know WHEN the market will crash – only that if it keeps running on methadone it WILL crash.
This reminds me of Reagan’s first term. Volker wanted to kill inflation once and for all, and the way to do it was to jack interest rates so high that they would choke the life out of all the speculation out there. Reagan backed him up and had one of the scariest recessions of market history. But it worked.
Problem is that he couldn’t have won the election if he had PROMISED to choke the life out of the economy and force it to reboot.
Ryan is like Reagan – his only problem is that he’s honest about it. Romney just based his political future on the voters’ ability to do basic math. He’s doomed.
People are terrible at math.
And the speculative money-flow I’m seeing between the industries just proves it.
Tim

Ticker Symbol Industry
AWK WATER
CKP INSTRMNT
NUAN SOFTWARE
DEO BEVERAGE
ITC UTILCENT
NWE UTILWEST
NU UTILEAST
CRM B2B
WFR SEMICOND
BWP PIPEMLP

Just to add to the previous note, these are the WORST industries and stocks according to the model.
These are dominated by defensive stocks. Three power utilities and a water utility. Beverage is also defensive.
If these are the short selections… then the market seems to be expecting a liquidity driven breakout.
The market could be wrong, of course, but this is what it is expecting.

The sector model is now confirming XLU (utilities) to be the weak sector, replacing XLK (technology) as the sector to short.


So, the model is now long XLF (financials) or short XLU (if you're shorting).


That doesn't mean I'll be shorting. It only means that this is the weakest sector -- which is bullish for the broad market.