Mousetrap 2/12/2012; the tortoise and the hare

Condition Bear Market Rally
S&P Target 1020
Small Portfolio IAU & XLF 12.28%
Hedge XLU -1.80%

Position Date Return Days Call
SE 6/27/2011 16.33% 230 Hold
CLH 7/6/2011 19.46% 221 Hold
GCI 7/14/2011 7.35% 213 Hold
CSGS 10/3/2011 25.22% 132 Hold
NLY 10/25/2011 0.85% 110 Hold
DD 10/27/2011 5.77% 108 Hold
KBR 10/27/2011 14.28% 108 Hold
VG 10/27/2011 -9.74% 108 Buy
TTM 11/30/2011 50.12% 74 Hold
BT 1/4/2012 7.76% 39 Hold

S&P Annualized -0.27%
Small Portfolio Annualized 17.45%
Mousetrap Annualized 21.07%
Hedged Annualized 18.51%

The Mousetrap is continuing to hold its own in this absurd market we are in. VG remains the “Buy” even after recovering 20% this week. I’ve noticed that the Drug industry is accumulating a lot of fundamental value, and the technicals for the industry are inching closer to a buy position. If this pattern continues a bit longer we may be able to rotate into one of those stocks.

***SKIP THIS PART IF YOU’VE BEEN READING THE NOTES FOR A WHILE***

Just a quick note for some new folks: the Mousetrap is a hybrid technical / fundamental model that identifies industries with positive breadth and volume technical divergences, and selects the stocks within those industries with the best fundamental profile. There are basically two market forces that drive a stock up: 1) inflows of money into the STOCK from other investors (technical), or 2) inflows of money into the COMPANY through high profits and low debt (fundamental). The model attempts to invest in sound companies at a time that investors are beginning to gain interest. Each stock is 10% of the total portfolio value. The time target for holding a stock is approximately 1 year – since 1 year is the LONGEST time a technical indicator can hope to foresee, and 1 year is the SHORTEST time a fundamental mean reversion strategy can hope to work.

There are three versions of the model being tracked:

1) The Small Portfolio holds half gold (IAU) and half a chosen sector ETF (currently XLF, for the financial sector). This is for a small portfolio of less than $30,000 dollars. It is always long and untimed.
2) The Mousetrap holds 10% each in 10 selected stocks. This is for a portfolio of $30,000 dollars or more. It is always long and untimed.
3) The Hedged portfolio overlays the Mousetrap with a short position to control volatility in bearish conditions. It has a very rough timing model based on the relative technical ratios between bullish and bearish sectors.

The model went bearish in April of 2011 and has not yet reverted to a bullish configuration – although it is getting close. I would take the “S&P Target 1020” with a grain of salt. Hardly anyone expects that anymore, and frankly I don’t either.

Of course, my gut feeling expectations are almost always wrong, which is why I use models to keep from throwing all my money away (which is what I was doing BEFORE the models).

***BACK TO THE NORMAL NOTE***

About once a month I check out the secular configuration between Stocks, Bonds, and Gold. In a secular bull market Stocks and Bonds beat Gold. A secular bear begins with Bonds and Gold beating Stocks, and ends with Stocks and Gold beating Bonds. These long term relationships tend to last 10 to 20 years, and a typical investor can beat the market over his lifetime by simply holding the best two ETFs and avoiding the third (SPY, GLD, BND). If you go to [url]www.stockcharts.com[/url] and do a P&F chart set at 3% box sizes once a month, you can manage your own simple portfolio in five minutes once a month, do a trade about once every ten years, avoid TONS of taxes, and beat 95% of all hedge funds around the world (apologies to any friends running hedge funds). From 1982 to 1999 one would have been in Stocks and Bonds and avoided gold, making no trades, and paying no capital gains taxes for EIGHTEEN YEARS while beating most other investors and spending far less effort doing so. In 2000 one would have sold Stocks and held Bonds and Gold until late 2009, when one would have sold Bonds and held Stocks and Gold until today.

Today such a “secular investor” would still be holding Stocks and Gold (SPY and GLD) and avoiding Bonds (BND).

By the way, if you are advising people to hold Bonds, STOP!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! Bonds, MIGHT do well for a short time longer, but they are EXTREMELY dangerous at these suppressed interest rates.

To check stocks and gold, cut and paste this into a browser:

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

To check stocks and bonds:

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

To check bonds and gold:

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

Check it once a month, hold the best two, and relax for ten years at a stretch.

The small portfolio is therefore holding half stocks and half gold, with the stocks being a sector ETF.

The full Mousetrap is a bit more aggressive, being all in stocks.

As for normal TIMING in this market, I’ve seen so many technical systems being whipsawed that I’m convinced you’d do far better reading three month old news than reading current news. The problems plaguing this market are long term, and the central bank intervention is massive. This is not a normal market, and a person trying to do short term timing will likely find himself the brunt of the Tortoise and the Hare fable.

A tortoise knows this is a secular bear and proceeds slowly and methodically.

A hare zips from one wall to the other, smashing is nose in both directions.

In my own models I do NOT short. The most I will do is hedge. About 30% of my money is in gold, about 30% in the Mousetrap long positions, and about 30% is hedged. That’s about the only way I can report all three versions of my model in real time, but it’s also a comfortably boring set of positions to hold. I was traveling this week and didn’t have to worry about Greece.

And after all the excitement these last few years, I want as boring a portfolio as possible.

Tim

Condition Bear Market Rally
S&P Target 1020
Small Portfolio IAU & XLF 12.08%
Hedge XLU -1.50%

Position Date Return Days Call
SE 6/27/2011 15.76% 233 Hold
CLH 7/6/2011 18.31% 224 Hold
GCI 7/14/2011 7.72% 216 Hold
CSGS 10/3/2011 25.62% 135 Hold
NLY 10/25/2011 0.43% 113 Hold
DD 10/27/2011 2.27% 111 Hold
KBR 10/27/2011 11.72% 111 Hold
VG 10/27/2011 -29.44% 111 Buy
TTM 11/30/2011 63.73% 77 Hold
BT 1/4/2012 6.64% 42 Hold

S&P Annualized -0.21%
Small Portfolio Annualized 16.97%
Mousetrap Annualized 18.77%
Hedged Annualized 16.66%

All of the models are continuing to outperform the S&P, but it is likely that the long Mousetrap’s performance will take a hit in the near future.

Some time ago I posted this graph, and it’s important to revisit it:

<a href="http://s1009.photobucket.com/albums/af213/teclontz/?action=view&amp;current=Demographic-Stocks.png" target="_blank"><img src="http://i1009.photobucket.com/albums/af213/teclontz/Demographic-Stocks.png" border="0" alt="This is the S&amp;P 500 index from 1956 until today, superimposed against an inflated birthrate 46 years. It is a well known observation that the stock market reflects the number of employable people in the country (with an average age of 46). By this metric, the market has another 9 years of nowhere ahead of it."></a>


This is a representation of the relationship the S&P has to the birthrate 46 years previous (i.e. the average age in the workforce is about 46 years old, and the more workers available, the better the S&P performs). Since baby boomers are retiring and didn’t have enough of their own babies to support their retirement, the economy is in what is called a “Secular Bear Market” – basically a long sideways stall for about 15 to 20 years.

The limit for 2012 is 1348 for the S&P, and while the market can indeed go higher, it is not likely to STAY that way for very long.

The good news is that secular bears are a great time to invest in gold – which is what people have been doing a lot of for the past decade. We have a few years of this yet to go. Hence the fact that the small portfolio is half invested in gold (IAU) and half invested in a sector (XLF).

Obviously this isn’t very useful for short term timing, but it is good to keep in mind the fact that this demographic line serves as a ceiling for secular bears and a pedestal for secular bulls.

We are at that ceiling now.

Anything could happen short term, especially in these days of intense Fed intervention. Heck, 1400 could happen. But it is unlikely that the market will go on any kind of sustained bull market run from here. If it WERE healthy, Bernanke wouldn’t be so desperate to print money, would he? You don’t zap a healthy patient with heart paddles and adrenaline, do you?

My own Mousetrap models remain unchanged. I seriously doubt any kind of strong correction yet… more of a bouncing around a few percentage points for a while, before the cyclical bear resolves itself.

My friend Len is better at short term timing, and he tells me that people should consider selling into any small rallies right now.

I’ll be doing so myself on some discretionary trades not listed with this model.

Tim