Mousetrap 10/2/2011

Condition Bear Market
S&P Target 970
Hedge XLE 9.96% Closed
Hedge XLF -3.01%

Position Date Return Days Call
BKI 5/31/2011 -4.36% 123 Hold
CFI 6/22/2011 1.52% 101 Hold
SE 6/27/2011 -7.29% 96 Hold
AWR 7/5/2011 -3.64% 45 Closed
CLH 7/6/2011 -3.75% 87 Hold
GCI 7/14/2011 -29.98% 79 Hold
AGO 8/5/2011 -11.38% 57 Hold
DISH 8/10/2011 13.22% 52 Hold
GTAT 9/8/2011 -40.46% 23 Hold
CSGS NA NA NA Buy

Mousetrap Return -9.57%
S&P Return -10.98%
Hedged Return -3.39%

Mousetrap Annualized -47.44%
S&P Annualized -54.44%
Hedge Annualized -16.81%

Annualized Advantage 7.00%
Hedged Advantage 37.63%

The Hedged position on the Mousetrap is currently outperforming by 37.63%. I’ve been observing that 40% outperformance has recently acted as limits for downward moves, while the non-hedged position also outperforms by 40% near the top of these small rally attempts. If that pattern continues, the market would complete a retest of the lows before another rally attempt.

The problem, however, is that by the time people notice a pattern, it stops working.

Hence, the hedge.

The only path forward is to play the large moves – which is currently that of a cyclical bear market. Trying to time the small moves cannot be navigated without an extremely robust model, hard nerves, and enough liquidity to handle drawdowns.

I still anticipate a strong rally toward the long term moving averages before a capitulation below 1000.

The model is still only 80% committed, and now calling for a ninth hedged position: CSGS in the IT Services industry, hedged against an equal short position in XLF. Each position is a 10% allocation set at a limit of Friday’s closing price. Since it is a hedged position, it is also possible to enter these as market orders on a gap, PROVIDED that XLF gaps further up than CSGS (or CSGS further down than XLF).

Tim

Condition Bear Market
S&P Target 940
Hedge XLE 9.96% Closed
Hedge XLF 1.93%

Position Date Return Days Call
BKI 5/31/2011 -4.80% 125 Hold
CFI 6/22/2011 -4.00% 103 Hold
SE 6/27/2011 -8.81% 98 Hold
AWR 7/5/2011 -3.64% 45 Closed
CLH 7/6/2011 -10.26% 89 Hold
GCI 7/14/2011 -32.70% 81 Hold
AGO 8/5/2011 -16.54% 59 Hold
DISH 8/10/2011 6.76% 54 Hold
GTAT 9/8/2011 -43.76% 25 Hold
CSGS 10/3/2011 -1.83% 0 Buy

Mousetrap Return -11.96%
S&P Return -12.21%
Hedged Return -1.26%

Mousetrap Annualized -64.32%
S&P Annualized -65.67%
Hedge Annualized -6.76%

Annualized Advantage 1.34%
Hedged Advantage 58.91%

What amazes me the most is how violently value stocks are getting slammed. IWM (the Russell 2000 Value Index ETF) fell by more than 5% today.

The Hedged position continues to grind its way slowly ahead, but the long-only selections are bottomed out relative to the market.

All I can say at this point is that we are still due a rally, but the model will maintain its hedged position until the bear market is complete. A typical bear market would give us a strong rally in the 4th quarter, and then a full capitulation in the 1st quarter of 2012. In terms of the S&P 500, that would be a push past 1250, followed by a plunge below 950… accompanied by all the screams of terror we would hear on any good roller coaster ride.

The “buy” remains CSGS, with a short XLF hedge.

Tim

Condition Bear Market
S&P Target 940
Hedge XLE 9.96% Closed
Hedge XLF -1.98%

Position Date Return Days Call
BKI 5/31/2011 2.54% 126 Hold
CFI 6/22/2011 -3.88% 104 Hold
SE 6/27/2011 -6.76% 99 Hold
AWR 7/5/2011 -3.64% 45 Closed
CLH 7/6/2011 -7.47% 90 Hold
GCI 7/14/2011 -27.92% 82 Hold
AGO 8/5/2011 -15.49% 60 Hold
DISH 8/10/2011 12.09% 55 Hold
GTAT 9/8/2011 -34.52% 26 Hold
CSGS 10/3/2011 -0.40% 1 Buy

Mousetrap Return -8.55%
S&P Return -10.42%
Hedged Return -1.36%

Mousetrap Annualized -45.36%
S&P Annualized -55.33%
Hedge Annualized -7.23%

Annualized Advantage 9.97%
Hedged Advantage 48.10%

We are still in stage 2 of the 5 necessary sector rotations to complete a bear market. We have not yet had a successful rally, and we have certainly not seen the final capitulation.

What we HAVE seen is a continuing pattern of stops being broken for both long and short traders. Every time a reasonable support or resistance level is identifiable, it is subsequently broken.

The widening volatility will cause all but the most sophisticated timing mechanisms to lose money in BOTH directions. Lacking such sophistication, I remain hedged.

Fortunately, the hedged positions are operating as designed, and I am maintaining an advantage within the target range of S&P + 30%.

CSGS remains in the buy position, with an XLF short hedge.

Tim

Condition Bear Market
S&P Target 940
Hedge XLE 9.96% Closed
Hedge XLF -3.45%

Position Date Return Days Call
BKI 5/31/2011 4.32% 127 Hold
CFI 6/22/2011 -3.76% 105 Hold
SE 6/27/2011 -5.56% 100 Hold
AWR 7/5/2011 -3.64% 45 Closed
CLH 7/6/2011 -7.34% 91 Hold
GCI 7/14/2011 -23.14% 83 Hold
AGO 8/5/2011 -11.86% 61 Hold
DISH 8/10/2011 12.63% 56 Hold
GTAT 9/8/2011 -32.48% 27 Hold
CSGS 10/3/2011 2.39% 2 Buy

Mousetrap Return -6.84%
S&P Return -8.97%
Hedged Return -0.34%

Mousetrap Annualized -35.86%
S&P Annualized -47.01%
Hedge Annualized -1.77%

Annualized Advantage 11.15%
Hedged Advantage 45.25%

Because the Mousetrap is hedged, 9 positions (i.e. 90% long and 90% short) is fully loaded. When the bear market finally bottoms out I’ll be able to lift the hedge and add the 10th long position.

Until then, I’ll rotate when necessary. CFI is the closest to being terminated in the near future.

The idea from here is to simply wait until one position reaches a sell point and then rotate into a new position on a straight swap. But now, no further actions are called for until then.

My condolences to the family and friends of Steve Jobs. In all of the math and fury we sometimes forget that there are real people behind these stocks – who often change our lives for the better in ways that cannot be calculated on a spreadsheet.

Tim