Mousetrap 12/18/2011

Secular Hold IAU & XLF 1.37%
Condition Bear Market
S&P Target 940
Hedge XLU -1.04%

Position Date Return Days Call
SE 6/27/2011 11.15% 173 Hold
CLH 7/6/2011 13.66% 164 Hold
GCI 7/14/2011 -5.07% 156 Hold
CSGS 10/3/2011 15.12% 75 Hold
NLY 10/25/2011 -0.18% 53 Buy
DD 10/27/2011 -9.06% 51 Hold
KBR 10/27/2011 -13.41% 51 Hold
VG 10/27/2011 -30.61% 51 Hold
WHR 11/30/2011 -3.95% 17 Hold
TTM 11/30/2011 -7.25% 17 Hold

S&P Annualized -17.04%
Mousetrap Annualized -3.16%
Hedged Annualized -4.10%
Secular Annualized 2.49%

Gold has now weakened so that the secular configuration rates:

1) Stocks
2) Gold
3) Bonds

Remember, this is calculated from a very long view, using P&F box settings of 3%

The link will probably not work – to see it you will have to cut and paste this into a browser window:

http://stockcharts.com/def/servlet/SC.pnf?chart=$spx:$GOLD,PLPADANRBO[PA][D][F1!3!3.0!!2!20]&pref=G

This shows stocks edging out gold. And,

http://stockcharts.com/def/servlet/SC.pnf?chart=bnd:$GOLD,PLPADANRBO[PA][D][F1!3!3.0!!2!20]&pref=G

This shows bonds still underperforming.

The secular strategy is to simply avoid the worst selection (i.e. bonds). Right now, therefore, the secular model is holding XLF (financials) and IAU (gold). Of the three models, Mousetrap (fundamental / technical hybrid), Hedged (shorting XLU against the Mousetrap), and Secular (Gold and a Sector selection), the secular model is still outperforming, and is currently the only one still positive from 5/31/2011 to today.

While a 2.49% annual rate is nothing to dance about, it is nearly a 20% annualized advantage over the S&P.

It is also, I might add, by far the simplest model.

Value stocks tend to underperform during bear markets, and they also have negative seasonality from September 1 through December 31. Historically, value stocks do best from January 1 through August 31 (see [url]http://www.equityclock.com/seasonality/[/url] )

On that same chart you can also see that XLU is out of season, and XLF will be in season starting January 19th. This matches the money flow in my models, which is short XLU (utilities) and long XLF (financials).

Also, earlier this week I noted that my friend Len was short the market on his timing model. My own more primitive timing model is simply in a bear market, and no longer in rally status. Bounces are still shortable for the time being. The Mousetrap, of course, does not use short term timing, and remains unchanged.

Good luck. Bear markets are a pain.

Tim

[url]http://www.zerohedge.com/news/something-wrong-picture[/url]

Secular Hold IAU & XLF 1.52%
Condition Bear Market Rally
S&P Target 940
Hedge XLU -4.05%

Position Date Return Days Call
SE 6/27/2011 15.23% 179 Hold
CLH 7/6/2011 18.59% 170 Hold
GCI 7/14/2011 -1.62% 162 Hold
CSGS 10/3/2011 17.82% 81 Hold
NLY 10/25/2011 2.99% 59 Buy
DD 10/27/2011 -5.77% 57 Hold
KBR 10/27/2011 -3.37% 57 Hold
VG 10/27/2011 -27.38% 57 Hold
WHR 11/30/2011 4.13% 23 Hold
TTM 11/30/2011 1.60% 23 Hold

S&P Annualized -12.02%
Mousetrap Annualized 6.12%
Hedged Annualized -3.83%
Secular Annualized 2.69%

Some years ago Haugen wrote a book called “The January Effect.” Once the “effect” became well known, people started jumping on board early and it started to be called “The Santa Claus Rally”.

Once THIS became well known, another well known canard comes into play: “a well known effect will stop working once it becomes TOO well known.”

We’re right on the border of that problem. But first, an explanation.

The January Effect is created by end of the year rebalancing. Some people blame this on window dressing. Some blame it on simple rebalancing, happy holiday cheer, retail optimisim,etc. I also suspect that it could be caused by people unloading their short positions because, well, tax reporting on short positions is confusing for retail investors and their accountants. You’ll probably save more money in accountant fees closing your short positions than you would gain by holding them. So, a fear of accounting nightmare driven short squeeze.

The effect is SPECIFICALLY a bump in small caps; and, I might add, value stocks.

My own model seems to gravitate toward small cap value stocks, and the basic long-only option is outperforming the S&P at a rate of 18%.

The secular version (just IAU and XLF) is outperforming the S&P by 15%.

The hedged option is only outperforming by 8%. That’s important going forward, for two reasons. 1) hedged positions require margin and are therefore charged interest by the broker, and 2) an outperformance of 18%, while below my 30% target, would still be sufficient to negate the NEED to hedge. We’ll know for sure once the test period is complete (5/31/2012), because the “bottom” should occur by then.

As I write this, my friend Len, the timing expert, has noted this evening that breadth is confirming a likely target somewhat higher than the November highs. This, too, would correspond with the small cap aspects of Haugen’s “January Effect.”

Christmas Crash, or January Effect?

Probably the latter, according to Len.

In fairness to Len, he actually made this call a couple of days ago (the day 600 billion was injected into the European banking system and the DOW jumped 300 points), but he’s reinforcing it now.

The effect is normally good for about two weeks, although seasonality for value stocks will continue past that time (per [url]www.equityclock.com[/url]).

Tim