09/05/11 Mousetrap

Condition Bear Market
S&P Target 970
Hedge XLE -2.25%

Position Date Return Days Call
BKI 5/31/2011 -0.16% 95 Hold
CFI 6/22/2011 2.24% 73 Hold
SE 6/27/2011 -3.85% 68 Hold
AWR 7/5/2011 -3.64% 45 Closed
CLH 7/6/2011 -3.45% 59 Hold
GCI 7/14/2011 -23.29% 51 Buy
AGO 8/5/2011 2.09% 29 Hold
DISH 8/10/2011 9.83% 24 Hold
NA NA NA NA NA
NA NA NA NA NA
Mousetrap Return -2.53%
S&P Return -8.72%
Hedged Return -4.50%

Mousetrap Annualized -16.64%
S&P Annualized -57.41%
Hedge Annualized -29.60%

Annualized Advantage 40.77%
Hedged Advantage 27.82%

Just a word about “doubling down” on a stock that has lost a good deal and looks like it’s an even better buy. As tempting as it may appear, layering into a stock that is losing money, while a typical fundamental investment practice, is not something I would do here.

Sometimes a stock loses money and keeps losing money in defiance of its fundamentals – only to have the fundamentals later change to confirm the downward spiral. This is one of the core differences between a technical trader (who follows the theory that price movements predict future fundamentals), and a fundamental trader (who follows the theory that fundamentals predict future price movements). When a stock falls below a certain threshold a technical trader will dump the stock for a stop loss, and a fundamental trader will put more money into the stock.

The question is what to do in a hybrid fundamental /technical model. Do you take money out or put money in?

In the case of the current model, I am doing neither. There IS a “stop loss” position on the model, but it is currently occupied by the Thrift industry. SE, which is only down 3.85% at the moment, is actually closer to the stop loss position than GCI.

In any case, the model is hedged. Currently the long-only option is out-performing by better than 40%, while the hedged option is only out-performing by less than 30%. I expect these two options to switch positions in a renewed downtrend.

Yes, GCI is the buy, but a discretionary trader should consider waiting unless entering a short hedged position at the same time to offset the likely retest of the August lows.

Tim

Condition Bear Market
S&P Target 970
Hedge XLE -1.14%

Position Date Return Days Call
BKI 5/31/2011 0.64% 98 Hold
CFI 6/22/2011 0.44% 76 Hold
SE 6/27/2011 -5.97% 71 Hold
AWR 7/5/2011 -3.64% 45 Closed
CLH 7/6/2011 -3.60% 62 Hold
GCI 7/14/2011 -26.74% 54 Buy
AGO 8/5/2011 0.72% 32 Hold
DISH 8/10/2011 8.75% 27 Hold
NA NA NA NA NA
NA NA NA NA NA
Mousetrap Return -3.68%
S&P Return -9.32%
Hedged Return -4.67%

Mousetrap Annualized -23.09%
S&P Annualized -58.60%
Hedge Annualized -29.36%

Annualized Advantage 35.50%
Hedged Advantage 29.24%

The hedged return is nearing a 30% advantage, and the long only return is still above 30%. I suspect that we have a little lower to go before the next mini-bounce, but this is normal bear market behavior. Typical stop losses will get taken out on the long and the short side, causing both long investors and short sellers to lose money.

My own returns, being hedged are moving less than 1% a day even while the rest of the market gyrates around. Without a very sophisticated timing model and nerves of steel, the only options in a bear are hedged or in cash.

Hopefully the model will work out a reasonable gain by the end of the bear – probably in the next six months or so.

GCI remains the buy – and it’s getting close to the next reasonable buy point. Anywhere in the next few sessions would be reasonable, but should be hedged with a compensating short position, which the model is using with an XLE short.

Tim

Condition Bear Market
S&P Target 970
Hedge XLE -4.84%

Position Date Return Days Call Hedge
BKI 5/31/2011 4.56% 99 Hold XLE -0.28%
CFI 6/22/2011 1.28% 77 Hold XLE -3.56%
SE 6/27/2011 -3.55% 72 Hold XLE -8.39%
AWR 7/5/2011 -3.64% 45 Closed None -3.64%
CLH 7/6/2011 -1.18% 63 Hold XLE -6.02%
GCI 7/14/2011 -22.48% 55 Hold XLE -27.32%
AGO 8/5/2011 4.51% 33 Hold XLE -0.33%
DISH 8/10/2011 15.43% 28 Hold XLE 10.59%
GTAT NA NA NA Buy XLE
NA NA NA NA NA
Mousetrap Return -0.63%
S&P Return -7.03%
Hedged Return -4.87%

Mousetrap Annualized -3.92%
S&P Annualized -43.51%
Hedge Annualized -30.14%

Annualized Advantage 39.58%
Hedged Advantage 13.37%

I’m placing a buy limit order on GTAT at today’s closing price of 11.85, with an addition to the XLE short also at today’s closing price of 67.90.

Condition Bear Market
S&P Target 970
Hedge XLE -3.00%

Position Date Return Days Call
BKI 5/31/2011 2.22% 100 Hold
CFI 6/22/2011 1.28% 78 Hold
SE 6/27/2011 -4.50% 73 Hold
AWR 7/5/2011 -3.64% 45 Closed
CLH 7/6/2011 -2.82% 64 Hold
GCI 7/14/2011 -27.48% 56 Hold
AGO 8/5/2011 -2.67% 34 Hold
DISH 8/10/2011 13.49% 29 Hold
GTAT 9/8/2011 -2.37% 0 Buy
NA NA NA NA NA
Mousetrap Return -2.94%
S&P Return -7.14%
Hedged Return -5.64%

Mousetrap Annualized -20.20%
S&P Annualized -49.02%
Hedge Annualized -34.41%

Annualized Advantage 28.82%
Hedged Advantage 14.61%

The model got whacked on 09/08, with the outperformance falling below 30% on the basic long model for the first time in over a month.

Yesterday was a flight away from value, indicating a very pessimistic view of the ability of fundamentals to affect future price movements. Money flow in Energy and Financials continue to drag the broad market, and both are nearly even for last place in my sector rotation model.

Technical stocks continue to attract money, but overall the relationship of all sectors remain bearish.

I’ll try to write a more detailed explanation of the sector relationships this weekend.

Tim