Mousetrap 8/14/2011

Condition Bear Market
S&P Target 800

Position Date Return Days Call
BKI 5/31/2011 3.89% 74 Hold
CFI 6/22/2011 2.60% 52 Hold
SE 6/27/2011 -7.26% 47 Hold
AWR 7/5/2011 -3.10% 39 Hold
CLH 7/6/2011 -4.15% 38 Hold
GCI 7/14/2011 -25.05% 30 Hold
AGO 8/5/2011 -7.27% 8 Buy
DISH 8/10/2011 4.41% 3 Hold
NA NA NA NA NA
NA NA NA NA NA
Mousetrap Return -4.49%
S&P Return -7.88%

Mousetrap Annualized -45.10%
S&P Annualized -79.08%

Annualized Advantage 33.98%

The good news is that the Mousetrap model is back to its target performance: beating the S&P500 by an annual rate of 30%.

The bad news is that the S&P500 remains on track to do worse than -30%. My yield ratio model is showing -37% returns with current long term momentum. The 800 target above is the HIGHEST projection in my two models. The yield ratio model’s projection is actually 700.

My timed model is still in cash, still waiting to short XLE when the current mini-rally exhausts itself.

And the Mousetrap model will keep building up until it is fully loaded and rotating around sectors and stocks. It’s rather annoying doing a proof of concept on a long-only untimed model at the beginning of what may be a vicious bear market.

But I will continue to do so. This is not all of my portfolio. I run three strategies and I’m down about 2% since the market top overall.

Navigating a bear market is extremely difficult. For most folks, cash is the best place to be. The moves are so violent and convincing that people will sell their long positions and go short just before a rally, and do the reverse just before the rally exhausts itself.

I still expect this rally to take us toward 1250 before it gives up the ghost. Once it does, the short XLE position will serve as a hedge. The net effect should be better than cash – but probably not by a great margin.

Tim

Condition Bear Market
S&P Target 975

Position Date Return Days Call
BKI 5/31/2011 5.91% 76 Hold
CFI 6/22/2011 4.41% 54 Hold
SE 6/27/2011 -4.31% 49 Hold
AWR 7/5/2011 -1.34% 41 Hold
CLH 7/6/2011 -3.25% 40 Hold
GCI 7/14/2011 -21.09% 32 Hold
AGO 8/5/2011 -3.23% 10 Hold
DISH 8/10/2011 6.85% 5 Buy
NA NA NA NA NA
NA NA NA NA NA
Mousetrap Return -2.01%
S&P Return -5.87%

Mousetrap Annualized -19.10%
S&P Annualized -55.85%

Annualized Advantage 36.76%

First, the Mousetrap model – after a few days below the performance target range, it is back to outperforming the S&P by more than 30%.

Next, the S&P itself – my sector configuration model is showing a progression in the rotation through the bearish sectors. As they progress we get closer to the end of the bear. While that is still showing a bottom more than 200 points lower than the current level, that’s an immense improvement over the previous projection of 800. While 975 would be an uncomfortable dip, it is not as significant as what the model has been projecting.

We’ll see as we go. We still have not finished rotating through the bearish sectors, and until we do finish, the likelihood of continued drops remains.

Condition Bear Market
S&P Target 970

Position Date Return Days Call
BKI 5/31/2011 2.70% 78 Hold
CFI 6/22/2011 3.93% 56 Hold
SE 6/27/2011 -5.10% 51 Hold
AWR 7/5/2011 -1.39% 43 Hold
CLH 7/6/2011 -5.54% 42 Hold
GCI 7/14/2011 -19.10% 34 Hold
AGO 8/5/2011 -2.91% 12 Hold
DISH 8/10/2011 6.12% 7 Buy
NA NA NA NA NA
NA NA NA NA NA
Mousetrap Return -2.66%
S&P Return -6.79%

Mousetrap Annualized -24.07%
S&P Annualized -61.38%

Annualized Advantage 37.31%

Still within the target performance advantage.

No real changes. The S&P target is slipping downward again. Two positions remain to be filled.

I’m curious to see where this uptick fizzles. Although I was hoping for 1250, the market doesn’t operate on hope.

Condition Bear Market
S&P Target 960

Position Date Return Days Call
BKI 5/31/2011 5.24% 78 Hold
CFI 6/22/2011 5.13% 56 Buy
SE 6/27/2011 -4.42% 51 Hold
AWR 7/5/2011 -1.31% 43 Hold
CLH 7/6/2011 -3.83% 42 Hold
GCI 7/14/2011 -19.76% 34 Hold
AGO 8/5/2011 -1.38% 12 Hold
DISH 8/10/2011 6.30% 7 Hold
NA NA NA NA NA
NA NA NA NA NA
Mousetrap Return -1.75%
S&P Return -6.70%

Mousetrap Annualized -15.87%
S&P Annualized -60.58%

Annualized Advantage 44.72%


The model is now outperforming the S&P by an annual rate of 44.72%. That’s a little high for the model, and the target performance is S&P + 30% (and most days the performance advantage is indeed in the 30-40% range).

The S&P projection has fallen again, now to 960, which is better than a 20% drop from today’s prices.

So that leads to the question of how I personally use the model.

The model is, first and foremost, untimed. Even though I am projecting a bear market, the model remains long. As a fundamental-technical hybrid model, the only purpose is to beat the S&P500 by a significant enough margin that there is little purpose to actually trying to weave in and out between long and short positions. That said, there are some features of how I am using the model that will show how I plan to use a bear market to my advantage. So, here is how I am using this model with my own funds.

1) I only buy a stock when it is listed as a buy. Buys are at a point of maximum positive money flow in their industry and maximum fundamental characteristics for the stock.
2) All buys and sells are set as a limit order on yesterday’s closing price. I do not chase a stock. If it misses, I’ll catch it the next time it wobbles into a good buy point.
3) Once fully loaded, I will rotate through ten stocks, with an initial investment as exactly ten percent of the last maximum value of the portfolio.

Number 3, as I use it, requires a margin account. If I did not have a margin account, I’d simply use the remaining funds on my tenth position and call it a day. But a margin account could take advantage of a bear market with very little risk.

Imagine if an account started with 100,000 dollars. Each position would have 10,000 apiece. If the account rose to 110,000 dollars each new position would have 11,000 apiece.

If the market then fell so that my account only had 100,000 dollars again, I would still invest 11,000 in each new position.

That would give a slight margin over time, so that I would be slightly more than 100% invested around the bottom of a bear market, and no more than 100% invested at the top of a bull. Since the model rotates rather slowly through each position the total account would not itself be very margined. A 10% margin on one stock out of ten is only about 1% margined on the total account.

While conservative, I don’t have to do much more than that anyway. Beating the S&P by 30% is the target for the model. That’s extremely ambitious as it is. An ordinary investor doesn’t use margin, and in fact the model does not require it.

That said, the performance numbers I show for returns will NEVER reflect any margin. If a stock earned 30% with 10% margin I would not report 33% gain, but only the non-margined 30%.

As it stands the model is still in beta testing. I am using real money in a real account. I have back-tested the technicals and tested the fundamentals in real time – but I have NOT tested them together. The test of this hybrid approach is being done live – right now – in these notes that I am sending. I feel confident about the prospects, but this remains only a test at present.

Tim

On an aside -- the technical aspects of this model are what I am testing on the sector adaptations to the IWM Robot in the Algo forum.

[QUOTE=Timothy Clontz;15804]Condition Bear Market
S&P Target 960

Position Date Return Days Call
BKI 5/31/2011 5.24% 78 Hold
CFI 6/22/2011 5.13% 56 Buy
SE 6/27/2011 -4.42% 51 Hold
AWR 7/5/2011 -1.31% 43 Hold
CLH 7/6/2011 -3.83% 42 Hold
GCI 7/14/2011 -19.76% 34 Hold
AGO 8/5/2011 -1.38% 12 Hold
DISH 8/10/2011 6.30% 7 Hold
NA NA NA NA NA
NA NA NA NA NA
Mousetrap Return -1.75%
S&P Return -6.70%

Mousetrap Annualized -15.87%
S&P Annualized -60.58%

Annualized Advantage 44.72%


The model is now outperforming the S&P by an annual rate of 44.72%. That’s a little high for the model, and the target performance is S&P + 30% (and most days the performance advantage is indeed in the 30-40% range).

The S&P projection has fallen again, now to 960, which is better than a 20% drop from today’s prices.

So that leads to the question of how I personally use the model.

The model is, first and foremost, untimed. Even though I am projecting a bear market, the model remains long. As a fundamental-technical hybrid model, the only purpose is to beat the S&P500 by a significant enough margin that there is little purpose to actually trying to weave in and out between long and short positions. That said, there are some features of how I am using the model that will show how I plan to use a bear market to my advantage. So, here is how I am using this model with my own funds.

1) I only buy a stock when it is listed as a buy. Buys are at a point of maximum positive money flow in their industry and maximum fundamental characteristics for the stock.
2) All buys and sells are set as a limit order on yesterday’s closing price. I do not chase a stock. If it misses, I’ll catch it the next time it wobbles into a good buy point.
3) Once fully loaded, I will rotate through ten stocks, with an initial investment as exactly ten percent of the last maximum value of the portfolio.

Number 3, as I use it, requires a margin account. If I did not have a margin account, I’d simply use the remaining funds on my tenth position and call it a day. But a margin account could take advantage of a bear market with very little risk.

Imagine if an account started with 100,000 dollars. Each position would have 10,000 apiece. If the account rose to 110,000 dollars each new position would have 11,000 apiece.

If the market then fell so that my account only had 100,000 dollars again, I would still invest 11,000 in each new position.

That would give a slight margin over time, so that I would be slightly more than 100% invested around the bottom of a bear market, and no more than 100% invested at the top of a bull. Since the model rotates rather slowly through each position the total account would not itself be very margined. A 10% margin on one stock out of ten is only about 1% margined on the total account.

While conservative, I don’t have to do much more than that anyway. Beating the S&P by 30% is the target for the model. That’s extremely ambitious as it is. An ordinary investor doesn’t use margin, and in fact the model does not require it.

That said, the performance numbers I show for returns will NEVER reflect any margin. If a stock earned 30% with 10% margin I would not report 33% gain, but only the non-margined 30%.

As it stands the model is still in beta testing. I am using real money in a real account. I have back-tested the technicals and tested the fundamentals in real time – but I have NOT tested them together. The test of this hybrid approach is being done live – right now – in these notes that I am sending. I feel confident about the prospects, but this remains only a test at present.

Tim

On an aside -- the technical aspects of this model are what I am testing on the sector adaptations to the IWM Robot in the Algo forum.[/QUOTE]

Hi Tim,

Sorry if I missed this but what is your sell criteria ?

Trev

My model looks to invest in industries with the best LONG TERM money flow, and to avoid industries with the worst long term money flow.

About half of the industry "positions" on my model, then, are sell positions. If an industry enters one of those positions I'll sell the stock within it.

The other condition is if I have a new stock entering a buy position and I already own ten stocks. I'll sell the stock with the worst long term money flow, even if it has not entered the sell position. Even though I will normally keep ten stocks, it is possible that I will have two sells hit and only one buy. This would normally happen at the end of a major trend, like a bull or bear market, when industry rotation is at the highest.

Pascal uses short term money flow, but since mine is a technical and fundamental hybrid model, I use very long term money flow. When I have a stock as a buy, very often it will appear extremely bad on Pascal's model -- so bad it is burning out all of the short term traders. That's okay, because a short term trader can sell a stock to a long term investor and they could BOTH profit based on their investment time horizons.

In other words, someone with my model could very easily be one of the people buying a short right when Pascal is covering it! And both people would profit.

The actual money flow calculations are based on the work of Len Mansky, rather than effective volume. I don't have intraday data, but because the model is long term, it is possible to use daily data.

Perhaps after I finish this proof of concept (and after I get a MUCH more powerful computer), I may one day examine intraday data. Right now I couldn't crunch the kind of data Pascal does even if I had it.

Tim

Condition Bear Market
S&P Target 970

Position Date Return Days Call
BKI 5/31/2011 -0.75% 79 Hold
CFI 6/22/2011 -4.73% 57 Buy
SE 6/27/2011 -8.31% 52 Hold
AWR 7/5/2011 -3.64% 44 Sell
CLH 7/6/2011 -10.98% 43 Hold
GCI 7/14/2011 -26.60% 35 Hold
AGO 8/5/2011 -6.30% 13 Hold
DISH 8/10/2011 0.43% 8 Hold
NA NA NA NA NA
NA NA NA NA NA
Mousetrap Return -7.61%
S&P Return -10.86%

Mousetrap Annualized -67.18%
S&P Annualized -95.85%

Annualized Advantage 28.67%

AWR has had a valiant run, but the money flow is no longer supporting its industry. It is now listed as a sell at today’s closing price.