Mousetrap 10/23/2011

Condition Bear Market Rally
S&P Target 940
Hedge XLE 9.96% Closed
Hedge XLF -14.14%

Position Date Return Days Call
AWR 7/5/2011 -3.64% 45 Closed
BKI 5/31/2011 12.34% 144 Hold
CFI 6/22/2011 1.52% 122 Hold
SE 6/27/2011 6.80% 117 Hold
CLH 7/6/2011 1.62% 108 Hold
GCI 7/14/2011 -18.00% 100 Buy
AGO 8/5/2011 0.72% 78 Hold
DISH 8/10/2011 17.11% 73 Hold
GTAT 9/8/2011 -40.29% 44 Hold
CSGS 10/3/2011 10.58% 19 Hold
Cash-Neutral 5/31/2011 0.00% 144

Mousetrap Return -1.02%
S&P Return -2.58%
Hedged Return -5.73%

Mousetrap Annualized -4.13%
S&P Annualized -10.45%
Hedge Annualized -23.15%

Annualized Advantage 6.32%
Hedged Advantage -12.70%

About a month ago we were assured through various stress tests in Europe that Dexia and other banks were healthy.

In the US, the Federal Government was apparently so confident in our own banking system that they felt they could push forward a lawsuit to bring banks back down to earth.

Now, with Greece on the brink of sovereign debt default, the US is hinting at a possible settlement and Europe is saving the “healthiest bank in Europe” with a bailout.

Wait, what? That’s right. Dexia was listed as the HEALTHIEST bank in Europe… [url]http://www.bloomberg.com/news/2011-10-13/no-1-financial-strength-ranking-spells-doom-commentary-by-jonathan-weil.html[/url]

If the healthiest bank needs a rescue, that doesn’t speak well for the rest.

This week my value stocks got slammed while my financial stocks soared on hopes, prayers, and petitions, of temporary salvation from above. Not much to be done when governments play Deus Ex Machina but to wait it out. In a healthy market people would be buying value; in an unhealthy market people would be buying bailout whispers.

This isn’t going to end well.

Tim

Thank you Tim.
About Dexia, its chairman was a former Belgian Prime Minister who was also Chairman of speech-recognition Lernout & Hauspie at the time it went bankrupt for fraud accounting reasons and whose patents were later developed by Nuance Communication (NUAN).
The trick when politicians become leaders of corporations is that their address book and political influences can hardly make up the fact that they are themselves often manipulated by the real managers of the company who are easily corrupting the political world through the Chairman.
There’s nothing like being an independent trader avoiding all those hidden agendas and professional life messes!
You can rely on no one but yourself.
Billy

Thanks for the word of caution, Billy!

Unless NLY gaps significantly higher than CFI in the morning, I’ll sell CFI and replace it with NLY.

I was able to enter the NLY trade, but not exit the CFI trade, so I’m long in both.

Because my margin is tight, I’m not hedged on the NLY trade.

This is a bit too tight for my comfort, but I’ll let it sit for now.

Just sold DISH at 25.99 for a 17.87% gain.

Sorry for no advance warning. Decided to take some profit after today's move in the market.

Just sold BKI at 29.39 for a 17.05% profit.

Added two more...

BKI for 17.05% gain
DISH for 17.87% gain.
AGO for 14.41% gain.
CFI for 4.10% gain.

Wasn't planning these, but we hit the 200 day moving average on the S&P, and paused. Seemed a good time to take two trades off the table.

That leaves me 60% long and 90% short at the moment. Will probably add some long positions, but not any today.

The market completed a bear rally to the 200 day moving average…

…and kept going.

I don’t have time for a full update, but the 200 day moving average is a good time to rebalance. I took profits on BKI, CFI, AGO, and DISH.

That leaves a 90% short position on XLF, and 10% each on six long positions:

SE
GTAT
NLY
CSGS
CLH
GCI

I plan to buy the following 4 stocks at today’s closing prices:

AMGN
KBR
VG
DD

Apologies for the sudden change, but I was not expecting the 200 day average to be breached today.

As for market timing – it’s a coin toss. Even above the 200 day moving average we have a bearish sector configuration, and in fact the sector rotation model now shows that we have progressed from Bear 2 to Bear 3:

XLY Cyclicals Bottom
XLK Technology Bull 1
XLI Industrial Bull 2
XLB Basic Industry Bull 3
XLE Energy Top
XLP Staples Bear 1
XLV Services Bear 2
XLU Utilities Bear 3 (here)
XLF Finance Bear 4

Services (XLV) is still the best long position on the model, and Finance (XLF) is still the short position (though it’s been punished severely these past couple of weeks).

Tim,

XLV is not the Services ETF but the Health Care ETF.

Billy

That's correct. I was going by the sector application stockcharts gave it in their perf chart (rather than ishares own designation). I should probably rename that on my spreadsheet to avoid that name mismatch in the future. Thanks for the nudge! :-)