Mousetrap 10/16/2011

Condition Bear Market
S&P Target 940
Hedge XLE 9.96% Closed
Hedge XLF -9.53%

Position Date Return Days Call Hedge
AWR 7/5/2011 -3.64% 45 Closed None
BKI 5/31/2011 11.19% 138 Hold XLF
CFI 6/22/2011 6.33% 116 Hold XLF
SE 6/27/2011 0.64% 111 Hold XLF
CLH 7/6/2011 4.40% 102 Hold XLF
GCI 7/14/2011 -19.62% 94 Hold XLF
AGO 8/5/2011 -1.62% 72 Hold XLF
DISH 8/10/2011 24.29% 67 Hold XLF
GTAT 9/8/2011 -34.77% 38 Hold XLF
CSGS 10/3/2011 12.41% 13 Hold XLF
Cash-Neutral 5/31/2011 0.00% 138

Mousetrap Return -0.04%
S&P Return -8.59%
Hedged Return -0.55%

Mousetrap Annualized -0.15%
S&P Annualized -36.94%
Hedge Annualized -2.38%

Annualized Advantage 36.79%
Hedged Advantage 34.56%

In both long-only and hedged options, the Mousetrap is well within the target performance range of beating the S&P at a 30% annual rate.

The numbers may appear slightly off for the hedged position because the CSGS long position did not exist during the 9.96% XLE hedged gain, so it does not get credit for that gain, while the -9.53% XLF loss counts against it. That’s why the hedged position looks like it should be outperforming the non-hedged position, but is slightly underperforming.

In either case, the model continues to work well, and the performance graph on my trading account shows a nice steady climb with minimal volatility.

There is no recommended buy position. The best buy for the model is NLY in the REIT industry, but the model is already fully loaded and no stocks are yet ready to take profits.

The XLF hedge is approaching a closing position, with XLU (utilities) the most likely replacement. This could happen now at any time, and I’ll post when that will occur.

The current rally in stocks is on light volume, but most significant is that the volume is heavily shifted toward defensive sectors. From a sector configuration perspective, this is as cynical a rally as one can get. The exception to this bearish divergence is (as noted) XLU, but XLV (services) and XLP (consumer staples) are strongly outperforming bullish sectors, such as XLY (consumer cyclical) and XLI (industrial).

The market is not positioning itself for a sustained bull run. At best the S&P could break 1250 on fumes (light volume), but the bear is not over.

Tim