Mousetrap 10/30/2011

Condition Bear Market Rally
S&P Target 1020
Hedge XLF -19.93%


Position Date Return Days Call
SE 6/27/2011 10.24% 124 Hold
CLH 7/6/2011 8.29% 115 Hold
GCI 7/14/2011 -10.58% 107 Hold
GTAT 9/8/2011 -24.08% 51 Hold
CSGS 10/3/2011 15.99% 26 Hold
NLY 10/25/2011 3.60% 4 Buy
DD 10/27/2011 2.03% 2 Hold
AMGN 10/27/2011 -1.21% 2 Hold
KBR 10/27/2011 -2.35% 2 Hold
VG 10/27/2011 0.26% 2 Hold

Mousetrap Return 5.20%
S&P Return -4.47%
Hedged Return -4.16%

Mousetrap Annualized 12.57%
S&P Annualized -10.81%
Hedged Annualized -10.06%

Long Advantage 23.38%
Hedged Advantage 0.75%

The percentages being reported include all open and closed positions from 5/31/2011, when the test began.

So far the long-only version is continuing to outperform, but at less than the 30% target. The hedged position is being crushed by a 20% surge in Financials on hopes for Europe.

There are a few problems with Europe:

1) The Greek bailout still won’t save Greece.
2) Italy is next.
3) No one knows the extent of derivative contagion.

That third point is the most important, because derivatives wrap existing debt in so many layers of leverage that it is impossible to determine the true “debt” crisis a default would create. This week bondholders in Greek debt were requested to voluntarily forgive half of the debt to Greece. That’s not enough to save Greece in the long run, but in the short run the euphoria over Greece doesn’t account for the fact that the default burden was merely transferred from Greece to the bond holders. If that were the end of the story, then folks would be out a finite amount of money.

But that isn’t the end of the story. Those same bondholders had repackaged their bonds into other investment “vehicles” that other people took out… on leverage.

No one knows how many times this was done, or what the true debt burden is. It is possible that all of the losses and derivative losses will be within everyone’s tolerance limits. But it at any point margin calls occur, the extent of the damage will never be known until it’s over.

In simplest terms, then, the default burden was delayed in Greece by being transferred to “volunteers” who might be driven into default themselves. Worse, the derivatives mean that a lot of “volunteers” won’t even know they’ve been volunteered until their derivative of a derivative of a derivative investment mysteriously blows up in their face.

Rumor also has it that Europe and the US will coordinate some more quantitative easing. We could have another fake bull market, which, while meaningless for the economy, would punish short positions.

Things might get rather annoying in the short run for my XLF hedge.

Tim

Covered XLF and took out a short hedge on XLU.

Condition Bear Market
S&P Target 940
Hedge XLU 0.19%


Position Date Return Days Call
SE 6/27/2011 5.29% 127 Hold
CLH 7/6/2011 4.55% 118 Hold
GCI 7/14/2011 -18.52% 110 Hold
GTAT 9/8/2011 -32.91% 54 Buy
CSGS 10/3/2011 7.80% 29 Hold
NLY 10/25/2011 1.52% 7 Hold
DD 10/27/2011 -3.06% 5 Hold
AMGN 10/27/2011 -4.15% 5 Hold
KBR 10/27/2011 -8.42% 5 Hold
VG 10/27/2011 -7.98% 5 Hold

Mousetrap Return -0.61%
S&P Return -9.43%
Hedged Return -1.07%

Mousetrap Annualized -1.44%
S&P Annualized -22.38%
Hedged Annualized -2.55%

Long Advantage 20.93%
Hedged Advantage 19.83%

After the sharp moves down this week, XLF recovered half of its losses, and I’ve replaced it with a short position in XLU (utilities).

Utilities have the weakest money flow relative to their price, and their price strength has fallen relative to XLF.

The market continues to gyrate with the news, going from overbought to oversold. This is typical bear market behavior, meant to wipe out market timers in both directions.

Tim

Tim--

At what price did you go short XLU?

I enjoy monitoring your progress and considering your ideas. (And yes, I followed along for some nice gains a couple time, too!). Thanks,

I only did a double market order, since I was swapping one for the other. The price I happened to get was 34.20.

Keep in mind this was no comment on whether the market itself would go up or down. My model only showed that XLU was likely to underperform XLF for the next quarter.

Glad you made some gains!

This is external to the Mousetrap, but using the same analysis, my model shows extremely strong long term accumulation in gold etfs.

I just took a long position at market.

IAU seems to show better accumulation than GLD.

Secular Holds IAU XLV
Cyclical Target 940
Condition Bear Market
Hedge XLU -1.56%

Position Date Return Days Call
SE 6/27/2011 8.43% 128 Hold
CLH 7/6/2011 9.00% 119 Hold
GCI 7/14/2011 -16.75% 111 Hold
GTAT 9/8/2011 -30.62% 55 Buy
CSGS 10/3/2011 12.25% 30 Hold
NLY 10/25/2011 -0.49% 8 Hold
DD 10/27/2011 -1.10% 6 Hold
AMGN 10/27/2011 -5.42% 6 Hold
KBR 10/27/2011 -6.75% 6 Hold
VG 10/27/2011 -22.38% 6 Hold

Mousetrap Return -0.40%
S&P Return -7.98%
Hedged Return -2.14%

Mousetrap Annualized -0.95%
S&P Annualized -18.80%
Hedged Annualized -5.05%

Long Advantage 17.84%
Hedged Advantage 13.74%

Slight tweak to the way I report the model. I’m adding secular holds on the top line to indicate the two ETFs one would hold for secular investing.

The secular holds will slowly rotate. They will always be long.

In the first half of a secular bear, when bonds and gold outperform stocks the two holds will simply be IAU and BND. Once bonds fall out of favor, IAU will be listed with the appropriate long sector on my sector rotation model.

Right now those two holds are IAU and XLV (healthcare services).

Secular investing is very slow, but should outperform a simple buy and hold of SPY.

I’ve attached a short paper explaining how to rotate a secular core with the three ETFs GLD, IWM, and BND. My own substitution of sector rotation for simple IWM investing can be ignored if someone wanted to just hold a secular core and have some peace of mind.

There WILL be drawdowns, but less than simply holding SPY over time.

I am personally holding both of these investments that are listed, but will not routinely report returns (though I'll do so perhaps once a quarter).

Tim

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Just a note on sectors.

My model is showing strong accumulation in EWA (the Australia index), and strong distribution in XRT (consumer discretionary).

Strangely, every country but Canada has better accumulation than SPY and the dollar has distribution.

Basically, it seems that the world is betting on the real value of the S&P to fall compared to that of other countries, with Australia being the best bet.

I won't be making this play, but if I did, I'd likely go long EWA.