Mousetrap 1/14/2012

Secular Hold IAU & XLF 11.20%
Condition Bear Market Rally
S&P Target 1020
Hedge XLU -2.06%

Position Date Return Days Call
SE 6/27/2011 17.27% 201 Hold
CLH 7/6/2011 17.78% 192 Hold
GCI 7/14/2011 7.72% 184 Hold
CSGS 10/3/2011 24.34% 103 Hold
NLY 10/25/2011 0.00% 81 Hold
DD 10/27/2011 0.08% 79 Hold
KBR 10/27/2011 8.14% 79 Hold
VG 10/27/2011 -30.03% 79 Buy
TTM 11/30/2011 15.33% 45 Hold
BT 1/4/2012 -0.24% 10 Hold

S&P Annualized -6.68%
Mousetrap Annualized 11.41%
Hedged Annualized 0.98%
Secular Annualized 17.94%

True to form, the January effect has positively impacted value stocks and small caps, both of which are well represented in the Mousetrap model – which is now outperforming the S&P 500 by better than 18% (as measured by annualized performance since the model was launched on 5/31/2011).

Both of my broad market models are still showing a bear market, so the hedge is still listed – shorting XLU.

Some of the things making this an atypical market cycle:

1) Extreme government intervention.
2) Extreme limits to continued government intervention.

The market is teetering between these two competing forces. If governments can continue to intervene, we will eventually have runaway inflation. If governments choose austerity, we will eventually have a deflationary implosion.

The only thing NOT in the cards is smooth sailing. Either the market will collapse or take off in a fake bull market spurred by massive devaluation of all Western currencies: both the U.S. Dollar in QE3 and QE for the Euro.

The United States cannot do QE3 without European easing, however. If they did, they would simply push Europe over the edge and Europe would pull us down too. QE3 would simply show a sharp spike upward in the S&P, becoming a bull trap of historic proportions before all global markets collapsed.

At least, that’s how it looks right now.

The only thing I can see in my models is that whatever is going to happen will likely happen this quarter. Whatever the market does, it should to so suddenly and sharply, and whether it is above or below the 200 day moving average, I do not believe it will end the quarter AT the 200 day moving average, or anywhere close to it.

Tim

Secular Hold IAU & XLF 12.09%
Condition Bear Market Rally
S&P Target 1020
Hedge XLU -1.10%

Position Date Return Days Call
SE 6/27/2011 18.71% 206 Hold
CLH 7/6/2011 18.66% 197 Hold
GCI 7/14/2011 10.29% 189 Hold
CSGS 10/3/2011 25.22% 108 Hold
NLY 10/25/2011 0.30% 86 Hold
DD 10/27/2011 2.15% 84 Hold
KBR 10/27/2011 9.81% 84 Hold
VG 10/27/2011 -31.20% 84 Buy
TTM 11/30/2011 28.54% 50 Hold
BT 1/4/2012 1.20% 15 Hold

S&P Annualized -3.58%
Mousetrap Annualized 14.82%
Hedged Annualized 13.09%
Secular Annualized 18.94%

First, a quick note on the hedged return. As I noted a few months ago I was hedged at the time I started the model on 5/31/2011, but I am not reporting the gain I made from the market top to the intermediate bottom this past summer, because I was not reporting that investment (shorting XLE) in real time.

However, I did discover tonight that I made a simple math error in the reporting of the hedged position: I was treating it as if I were HALF long and HALF hedged, when in fact I was hedged on margin, remaining 100% long in the cash account. Rather than averaging the Mousetrap and the short positions, I should be adding them together. From 5/31/2011 to today the Mousetrap has made 9.45% and the reported short position (not including the gains shorting XLE that I was no reporting in real time) are -1.10%. 9.45% -1.10% is 8.35%, which is annualized to 13.09%.

I apologize for the reporting error, but it only became obvious to me when I was looking at the huge discrepancy between the hedged and long positions, when there should only be a 1.10% difference for the reported periods.

In any case, both of my timing models are very close to shifting from rally to bull status. If this momentum were to continue another 40 points on the S&P this month, both models could revert to bull. The sector model could revert any day, with aggregate S&P targets around 1600.

But we aren’t there yet.

I’m skeptical about the whole idea of decoupling from Europe. What I see happening is a flight to safety from Europe. European bonds aren’t safe. European stocks are in bear markets. Where should non-Americans invest? In China and the third world? Sure, but you’d be there already. If you were dumping European assets you’d put them into American assets. Hence, our stocks AND bonds are doing well. Fine. But this is very much like being on the port side of that Italian cruise and saying “we’re not sinking; look how we’re rising away from the water. Heck, look at all those starboard people running over here for safety!”

Right.

This is a global economy. Europe is sinking into the water. Bernanke has quite brilliantly (honestly, it was a good move) tried to ease European deflationary pressures through operation twist.

And it MIGHT work.

But all he did was buy Europe some time to solve their problems, and Europe hasn’t taken advantage of that time… yet.

In the meantime the Moustrap model is handily beating the market, whether in the stock, secular, or hedged optional portfolios.

Tim