Mousetrap 8/7/2011

Position Date Return Days Call
BKI 5/31/2011 0.91% 67 Hold
CFI 6/22/2011 9.21% 45 Hold
SE 6/27/2011 -6.12% 40 Hold
AWR 7/5/2011 -4.95% 32 Hold
CLH 7/6/2011 -1.56% 31 Hold
GCI 7/14/2011 -20.65% 23 Hold
AGO 8/5/2011 -2.59% 1 Buy

Mousetrap Return -3.68%
S&P Return -7.49%

Mousetrap Annualized -39.35%
S&P Annualized -80.13%

Annualized Advantage 40.78%

Outperforming the S&P may not be good enough, of course...

Keep in mind that this is an untimed model. The goal is to do better than the S&P (which in this case appears to be "losing money slower than the stock market"). We'll see. There are a number of small caps here, and they are more volatile than the market as a whole. I'm quite intrigued to see how the model does during a serious decline.

I do note, however, that of the 7 selections so far, two are utilities. That should put some brakes on the decline.

If I seem non-plussed it's because I've been running a short XLE position that's been serving as a decent hedge overall. But that's just a personal hedge, and not a part of this model. This model is long only, and untimed.

Good luck out there.

Tim

Position Date Return Days Call
BKI 5/31/2011 -5.59% 70 Hold
CFI 6/22/2011 -2.44% 48 Hold
SE 6/27/2011 -12.55% 43 Hold
AWR 7/5/2011 -10.96% 35 Hold
CLH 7/6/2011 -9.35% 34 Hold
GCI 7/14/2011 -26.08% 26 Hold
AGO 8/5/2011 -16.54% 4 Buy



Mousetrap Return -11.93%
S&P Return -13.65%

Mousetrap Annualized -117.32%
S&P Annualized -134.27%

Annualized Advantage 16.96%

The market is outside the limits of any fundamental or technical analysis, and is into that bizarre world realm of a deflationary spiral. Every sector, every stock, is up for grabs.

In 23 years the Vix has never spiked more than three standard deviations from its previous low. It is now three standard deviations above the previous low. It holds now, or it goes beyond anything on record.

I normally don’t mention timing, but on my two timing models we’ve budged from 5-10% into a bear to 15-20% in the past week. One of my models is targeting 700 on the S&P.

All of that could change tomorrow – because there IS a cure for deflation, and “helicopter” Ben Bernanke knows what it is.

European central banks are discussing intervention. Bernanke’s FOMC is tomorrow. If he pulls out QE3 we’ll still have a bear, but the markets will calm into a more normal bear. If he rules QE3 out, 2008 will look like a picnic.

I note that on my “Mousetrap” model everything got slammed today. The annualized return rate for the S&P is at the obviously unsustainable -134.27%, and my own model is at -117.32%. It’s still “outperforming” but in an evil looking glass kind of way.

If you’re a market timer, XLE (energy) is still the sector ETF to short.

Tim

***NOTE: The model is not yet fully populated, and therefore the "Sell" listed for CLH was premature. Apologies for the confusion. I've changed it to "Hold" accordingly.

Position Date Return Days Call
BKI 5/31/2011 -0.59% 70 Hold
CFI 6/22/2011 -0.40% 48 Hold
SE 6/27/2011 -8.13% 43 Hold
AWR 7/5/2011 -1.48% 35 Hold
CLH 7/6/2011 -7.30% 34 Hold
GCI 7/14/2011 -23.36% 26 Hold
AGO 8/5/2011 -15.41% 4 Hold
DISH NA NA NA Buy


Mousetrap Return -8.10%
S&P Return -9.56%

Mousetrap Annualized -79.61%
S&P Annualized -94.02%

Annualized Advantage 14.41%

I was wondering how Bernanke was going to beguile the markets this time. We all knew he was politically discouraged from doing a QE3, but we also knew he was going to do SOMETHING.

Voila! Instead of saying he was going to give extra money over a short period of time, he was going to give lower interest rates over a long period of time. Since the markets are forward looking, once he put a specific DATE on it (out to the ridiculous horizon of 2013), the markets could do the math and rise accordingly. At first there appeared to be some confusion because there was no QE3, but then the market figured out that QE2013 was just as good. Granted, zero interest rate policy doesn’t directly inject money into the system in the same way – but it does have the same effect in the end. It’s kind of like drinking tequila, THEN drinking the margarita mix afterwards. By the time it gets in your stomach it has the same effect.

On my model I have a new position, DISH, which I will enter at today’s closing price.

Also, I’d like to add the cautionary note that we are now most probably in a Bear market. I expect the market to shoot up toward its long term moving averages, but fail a little south of 1300 on the S&P. While I don’t have a crystal ball, that would be NORMAL market behavior.

If it shoots past 1300 I may rethink some things, but both my yield ratio model and my sector configuration model are calling a Bear with a target in the 700-800 range. Those who use P&F charts will likely see a similar preliminary bearish price objective. Although my “Mousetrap” model is continuing to outperform the S&P, that would be small comfort by the time you got to the bottom. If you are holding any of these positions, be prepared to either unload them between 1250 and 1300, or else hedge.

My current hedge would be to short XLE, but NOT until we got higher than 1250 on the S&P.

Just to reinforce the bearish nature of this market – my top two performing stocks during the upturn today were both UTILITY stocks, with the water utility rising around 11%. That’s NOT where the money would be going in a healthy bull market. That’s a bearish defensive play, in the extreme.

Take it slow – in spite of the behavior of the past week, bear markets take time. There’s normally plenty of time to get properly positioned. While I’ll continue to run this model untimed – I also personally hedge. Enjoy the run up, but don’t get cocky.

Tim

Position Date Return Days Call
BKI 5/31/2011 -4.20% 71 Hold
CFI 6/22/2011 -4.97% 49 Hold
SE 6/27/2011 -11.26% 44 Hold
AWR 7/5/2011 -6.24% 36 Hold
CLH 7/6/2011 -11.65% 35 Hold
GCI 7/14/2011 -30.35% 27 Hold
AGO 8/5/2011 -19.93% 5 Buy
DISH 8/10/2011 -2.10% 0 Hold


Mousetrap Return -11.34%
S&P Return -12.41%

Mousetrap Annualized -124.08%
S&P Annualized -135.83%

Annualized Advantage 11.76%


The “Mousetrap” is barely limping along in the almost unprecedented decline in the market. As a long-only model, I suppose outperforming the S&P is good enough…


Timing model.

The good news is that the market decline helped me complete the confirmation testing on my timing model. The bad news is that I couldn’t put the timing model online until it was confirmed “out of sample.” Frankly, I didn’t BELIEVE the timing model, so the most I could do was use it as a hedge. I’ve mentioned on occasion that the sector to short was XLF, and then a few weeks ago I mentioned that the short sector was XLE. But I was not ready to share it until I was finished with the alpha testing.

So, now I have it ready. Only problem is that the market is WAY oversold, and it is not time to time the market until a short reversal from the new trend. The markets typically rally toward their long term moving averages, and then roll over for a final decline.

That would be around 1250.

In any case, the timed model is simple: no stock selection. It’s either long or short a single sector ETF and stays long or short until the business cycle trend changes. We are now in a bear. The short sector is XLE. When we have some kind of rally I’ll activate the selected short and post those changes along with the “Mousetrap”. And, while I’ve BEEN short the energy sector, I covered most of my short positions today.

But I do plan to re-enter the timed trades and share them in real time. I’ll also track the results as I do so, in the same way as the Mousetrap model.

That will leave two models: one timed, and one untimed; something for the long term investors (untimed) and the technical traders (timed).

In the meantime – enjoy the bounce. Len Mansky tells me it isn’t ready yet – but I will not use my timed model long in a bear market. So it’s on hold until the next clear short signal.

Tim

Condition Bear Market
S&P Target 800

Position Date Return Days Call
BKI 5/31/2011 1.03% 72 Hold
CFI 6/22/2011 2.01% 50 Hold
SE 6/27/2011 -7.44% 45 Hold
AWR 7/5/2011 -2.42% 37 Hold
CLH 7/6/2011 -6.70% 36 Hold
GCI 7/14/2011 -26.23% 28 Hold
AGO 8/5/2011 -9.28% 6 Buy
DISH 8/10/2011 2.69% 1 Hold
NA NA NA NA NA
NA NA NA NA NA
Mousetrap Return -5.79%
S&P Return -8.36%

Mousetrap Annualized -61.55%
S&P Annualized -88.80%

Annualized Advantage 27.25%


Two positions remain to be filled on the Mousetrap model. And, in spite of it being slammed with the rest of the market, it continues to outperform that market.

My target is to outperform the S&P by 30% a year.

If the S&P could avoid losing 30% a year, I’ll have a profit.

I’d like to point out, however, that my timing models are in a Bear. That could change, but the current price target is 800 on the S&P – a significant decline from the present.

Corporate profits are up, but this has nothing to do with corporate profits. This has everything to do with governmental failure; both a failure of European governments to avoid looming default, and a failure of our own government to avoid a European model. It doesn’t really matter how well you water your plants in your apartment if the skyscraper you are in is burning down all around you.

As I mentioned before, I’ve personally hedged by shorting XLE (the energy sector). Yesterday I also mentioned that I was closing that position in order to ride a short term rally up to about 1250 on the S&P. We may or may not get there, but XLK (technology) would be a good short term position to take on a spike up.

If we get to that point, though, I’m planning to resume the XLE short.

Don’t get tricked out by the volatility, though. People get forced out of long and short positions at the wrong time because the moves are so titanic that they look like they will go on forever. No matter how volatile the market is, a steady plan, and a steady hand, will usually win.

Wait for it… Bear markets begin with a stab downward, then a rush back up to the long term moving averages. Once they fail to penetrate those averages, then the final stage begins.

Tim