Mousetrap 3/17/2012 -- less is more

Condition Bear Market Rally
S&P Target 1020
Small Portfolio IAU & XLF 15.26%
Hedge XLU -1.74%

Position Date Return Days Call
CLH 7/6/2011 29.71% 255 Hold
GCI 7/14/2011 11.76% 247 Hold
CSGS 10/3/2011 26.57% 166 Hold
NLY 10/25/2011 -1.59% 144 Hold
DD 10/27/2011 10.38% 142 Hold
KBR 10/27/2011 28.32% 142 Hold
VG 10/27/2011 -32.38% 142 Hold
TTM 11/30/2011 67.46% 108 Hold
BT 1/4/2012 9.01% 73 Hold
PDLI 3/7/2012 1.88% 10 Buy

S&P Annualized 5.50%
Small Portfolio Annualized 19.15%
Mousetrap Annualized 22.54%
Hedged Annualized 20.35%

No changes. The we are still in a Bear Market Rally sector configuration. Utilities remains the hedge, and have thankfully gone nowhere while the rest of the market has been on a tear. In fact, the negative money flow in utilities is the most bullish thing about this rally.

Meanwhile, enough time has elapsed with the model that I can begin to optimize holding periods based on real data. A preliminary calculation has the optimal holding period at 179 days, meaning a new trade every two and a half weeks. I’ll do some more calculations over the course of the next week, but it appears that the next rotation day should be the Monday after March 24th.

There’s a reason to hold trades as long as possible, If you had 20,000 in your trading account, and were trading ten stocks, then each buy-sell round trip would knock off about 1% from your total holding.

So, for ten stocks, you adjust your total expected returns based on your average holding period. So, factoring trading costs and taxes, with a 7% average appreciation per stock, the average holding period would have to be 76 days JUST TO BREAK EVEN.

This is why women generally do better than men with their investments. They trade less.

In other words, less is more.

Tim

I’ve been studying the periodicity problem in more detail. After running all of the stocks selected and adjusting against the S&P, the optimized rotation schedule appears to be 66 days per stock – or roughly one trade a week. 179 days came in at a very close second.

I got this by looking at each stock’s return MINUS the S&P return for the same time period, in order to factor out random market movements.

In any case, it turns out that I WILL make a rotation tomorrow, if possible:

I’ll be selling CLH and buying CLF

CLF is Cliffs Natural Resources, in the STEEL industry.

The only thing that would cancel this plan would be a positive gap of CLF more than 1% greater than CLH. If that happens, I’ll check again at lunch and the end of the day. As long as they are within 1% of each other, I’ll make the trade.

Condition Bear Market Rally
S&P Target 1020
Small Portfolio IAU & XLF 16.19%
Hedge XLU -1.04%

Position Date Return Days Call
GCI 7/14/2011 12.71% 249 Hold
CSGS 10/3/2011 27.37% 168 Hold
NLY 10/25/2011 -1.65% 146 Hold
DD 10/27/2011 10.11% 144 Hold
KBR 10/27/2011 27.46% 144 Hold
VG 10/27/2011 -32.67% 144 Hold
TTM 11/30/2011 65.25% 110 Hold
BT 1/4/2012 10.74% 75 Hold
PDLI 3/7/2012 2.20% 12 Buy
CLF 3/19/2012 1.65% 0 Hold

S&P Annualized 5.98%
Small Portfolio Annualized 20.18%
Mousetrap Annualized 22.53%
Hedged Annualized 21.23%

The CLF trade was executed, selling CLH and buying CLF at the open.

I’ve still been working on the periodicity problem (i.e. how often to rotate). Yesterday I went through the daily returns of all open AND closed positions – showing the gains of the open positions and the gains the closed positions would have had if they were kept open. I also eliminated the random price movements of the S&P by subtracting the S&P returns from the date each trade was opened and then re-adding the average daily gains of the S&P over the course of the last 62 years. (You have to love this kind of thing)…

In any case, so far it appears that the ideal holding period is even further out than I suspected. 210 days per stock is currently the highest annualized score. That’s basically three weeks between each trade.

As time goes on the ideal holding period may be even further out, and it’s not impossible that we could find ourselves further out than a year.

Nearest I can tell, the technicals manage to give each stock liftoff into about 70 days before it begins to stall, and then the fundamentals give it a second wind at 150 days for another advance. Compound interest makes it worthwhile to hold the trade until at least 210 days, rather than trade at 70 as I originally thought.

So far I’ve initiated 20 long positions, ten open and ten closed:

OPEN Win Loss
GCI 1 12.71% 0.00% Hold 7/14/2011 12.71% 249
CSGS 1 27.37% 0.00% Hold 10/3/2011 27.37% 168
NLY 0 0.00% 1.65% Hold 10/25/2011 -1.65% 146
DD 1 10.11% 0.00% Hold 10/27/2011 10.11% 144
KBR 1 27.46% 0.00% Hold 10/27/2011 27.46% 144
VG 0 0.00% 32.67% Hold 10/27/2011 -32.67% 144
TTM 1 65.25% 0.00% Hold 11/30/2011 65.25% 110
BT 1 10.74% 0.00% Hold 1/4/2012 10.74% 75
PDLI 1 2.20% 0.00% Buy 3/7/2012 2.20% 12
CLF 1 1.65% 0.00% Hold 3/19/2012 1.65% 0

CLOSED
BKI 1 17.05% 0.00% Closed 5/31/2011 17.05% 149 10/27/2011
CFI 1 4.10% 0.00% Closed 6/22/2011 4.10% 127 10/27/2011
AWR 0 0.00% 3.64% Closed 7/5/2011 -3.64% 45 8/19/2011
AGO 1 14.41% 0.00% Closed 8/5/2011 14.41% 83 10/27/2011
DISH 1 17.87% 0.00% Closed 8/10/2011 17.87% 78 10/27/2011
GTAT 0 0.00% 35.32% Closed 9/8/2011 -35.32% 84 11/30/2011
AMGN 0 0.00% 2.16% Closed 10/27/2011 -2.16% 35 11/30/2011
WHR 0 0.00% 1.45% Closed 11/30/2011 -1.45% 30 12/30/2011
SE 1 17.60% 0.00% Closed 6/27/2011 17.60% 254 3/7/2012
CLH 1 29.07% 0.00% Closed 7/6/2011 29.07% 257 3/19/2012

These collectively amount to the 22.53% annualized return I reported above. HOWEVER, had I not closed the original positions I would have had a 41.75% annualized return.

As I said the other day – less is more.

The good news is that I’ve finally solved the rotation problem, and can actively track how often to rotate a position.

It’s well ahead of the S&P. Now it’s just a matter of fine tuning…

Tim

Condition Bear Market Rally
S&P Target 1020
Small Portfolio IAU & XLF 14.19%
Hedge XLU -1.18%

Position Date Return Days Call
GCI 7/14/2011 12.93% 252 Hold
CSGS 10/3/2011 24.26% 171 Hold
NLY 10/25/2011 -1.34% 149 Hold
DD 10/27/2011 7.98% 147 Hold
KBR 10/27/2011 23.06% 147 Hold
VG 10/27/2011 -34.73% 147 Buy
TTM 11/30/2011 54.84% 113 Hold
BT 1/4/2012 11.51% 78 Hold
PDLI 3/7/2012 2.45% 15 Hold
CLF 3/19/2012 -4.07% 3 Hold

S&P Annualized 4.36%
Small Portfolio Annualized 17.50%
Mousetrap Annualized 19.05%
Hedged Annualized 17.60%

The most amazing thing about this rally is how consistent it has been in regard to the money flow between the sectors. For the entire ride financials have been long and utilities have been short, and even with the action today that is still the case.

My friend Len is looking for a correction. I’m looking for an end to this rally – but I don’t see it yet. There just hasn’t been any meaningful shift… yet… into a defensive posture.

The model is holding its hedge – shorting utilities. And when you think about it, shorting UTILITIES is about as ambivalent a hedge as you can get. This is a market that punishes sudden moves, and it punishes decisive ones most of all.

Boring is a good thing.

Tim