08/23/2012 Mousetrap

Sector Model XLU & XLP -1.30%
Style Model Small Value

Large Portfolio Date Return Days
CAJ 9/25/2012 -11.22% 332
ABX 4/11/2013 -19.17% 134
TTM 5/6/2013 -13.54% 109
DLB 5/13/2013 -5.60% 102
OKE 6/17/2013 17.42% 67
BTI 7/1/2013 2.36% 53
CLH 7/8/2013 8.33% 46
FAST 7/22/2013 -2.84% 32
VAR 8/2/2013 -0.59% 21
OUTR 8/19/2013 -0.24% 4

(Since 5/31/2011)
S&P Annualized 9.79%
Sector Model Annualized 23.49%
Large Portfolio Annualized 28.39%

From: [url]http://market-mousetrap.blogspot.com/2013/08/08232013-market-top-formation.html[/url]

As I pointed out yesterday on the blog, the sector model switched from XLU & XLB, to XLU & XLP. In terms of market rotation, that is moving from a top combination to a bear combination. However, I don’t just look at sectors, but also market cap and styles (chart below).

So, a quick note on the market.

The recent flash freeze in Nasdaq is a symptom of a bull market that is getting long in the tooth. Also, the talk of tapering by the Fed has the market spooked to the point that large players are positioning themselves for a bear market. Accordingly, the combination of sector, market cap, and style configurations are in line for a market top:


[ATTACH=CONFIG]19637[/ATTACH]


NORMALLY the market has the following relationship with the Fed…

BEAR

At a market top the Fed starts to lower interest rates. During a bear market rally the Fed tries to allow interest rates to rise, and the market fails. During the final throes of a bear, both interest rates and market prices plummet together.

BULL

At a market bottom the Fed holds rates down while the market begins to turn. At a correction the Fed is tightening rates and the market stumbles, but recovers on its own. At a market top both prices and rates are rising together.

In a NORMAL market we’d be looking for a correction here, rather than a bear market.

HOWEVER, if we are indeed in the midst of a secular bear market (my own opinion based on the demographic hole in working age vs. non-working age people), then such a “correction” would fail to recover. A failed “correction” would be akin to 1937, when we had the depression within the depression.

I don’t have a crystal ball, and all this talk of tapering could just be a trial balloon. The Fed knows about 1937, and would LIKE to avoid it if possible. So, between the two options of a correction or a deflationary implosion, most large players seem to be positioning themselves for a normal to mild bear.

Since my model is long only, it does not time the market, but instead it rotates between industries and sectors. In a market dip I will dip too, but will rotate out of stocks that dip less and into ones that have dipped more, so that when a recovery does happen, I will be positioned to recover faster.

If you are faint of heart, though, the next few months could be a good time to take up yoga and meditation…

Tim