Mousetrap 8/20/2011

[Timothy Clontz]

Condition Bear Market
S&P Target 970
Hedge XLE 3.30%

Position Date Return Days Call
BKI 5/31/2011 -4.60% 83 Hold
CFI 6/22/2011 -6.29% 61 Hold
SE 6/27/2011 -9.71% 56 Hold
AWR 7/5/2011 -3.64% 45 Closed
CLH 7/6/2011 -11.45% 47 Hold
GCI 7/14/2011 -26.60% 39 Hold
AGO 8/5/2011 -8.80% 17 Hold
DISH 8/10/2011 -3.41% 12 Buy
NA NA NA NA NA
NA NA NA NA NA
Mousetrap Return -9.31%
S&P Return -12.18%
Hedged Return -6.01%

Mousetrap Annualized -75.59%
S&P Annualized -98.82%
Hedge Annualized -48.80%

Annualized Advantage 23.24%
Hedged Advantage 50.02%


The application of the hedge today was a little unnerving as the market gapped up. I still expect the hedged position to underperform on the way up, but that’s what hedges do. As it stands, the market gapped up and then fell back, giving an unusual head start to the hedge.

A little about hedging. A hedge is usually some kind of tangential or contrary position to the core positions being held. In this model, it is a short of a sector that has a negative money flow divergence from price. On my sector rotation model the long sector selection is XLK (technology), and the short is XLE (energy).

Technology is an odd long selection in a bear market. It does outperform near the beginning of a bull, but in this case the sector is attracting a lot of positive volume at what appears to be a bet toward a rally. When the rally does happen, I expect it to be a ferocious one – so much so that people will likely think there was no bear at all and it was just a correction.

THIS IS NOT A CORRECTION.

We are not even halfway through a bear market, and this is a very very nasty one.

Just a little anecdotal evidence: I run several macros that analyze 1100 stocks in 9 sectors and 98 industry groups. In the past three months since this model became active I’ve averaged one stock disappearing from existence a month.

TODAY FOUR DISSAPEARED.

This is NOT a correction.

Europe is about to make Lehman Brothers look like a cake walk. If you cannot hedge, consider lightening up on the next rally.

[Timothy Clontz]

Condition Bear Market
S&P Target 970
Hedge XLE -1.23%

Position Date Return Days Call
BKI 5/31/2011 2.10% 85 Hold
CFI 6/22/2011 -3.52% 63 Hold
SE 6/27/2011 -6.05% 58 Hold
AWR 7/5/2011 -3.64% 45 Closed
CLH 7/6/2011 -6.93% 49 Hold
GCI 7/14/2011 -23.95% 41 Hold
AGO 8/5/2011 -4.61% 19 Hold
DISH 8/10/2011 -0.61% 14 Buy
NA NA NA NA NA
NA NA NA NA NA
Mousetrap Return -5.90%
S&P Return -9.52%
Hedged Return -6.98%

Mousetrap Annualized -46.11%
S&P Annualized -74.41%
Hedge Annualized -54.51%

Annualized Advantage 28.30%
Hedged Advantage 19.89%


I’m still looking for that bounce (for admittedly anecdotal reasons):

1) The technology sector, XLK, has been accumulating a lot of positive volume – trouncing all of the other sectors by a significant margin.
2) That, and the fact that I added my hedge at what SHOULD be the worst possible time, makes me think this will be such a strong bounce that people will think the bear market never started (and I’ll even be itching to unload that hedge).

Len Mansky, however, tells me that he doesn’t think we’ll break the previous highs from earlier this month.

I’ll defer to him on the short term.

LONG TERM THIS IS A BEAR MARKET.

Do not be fooled by any bounces out there.

[Timothy Clontz]

Condition Bear Market
S&P Target 970
Hedge XLE -1.83%

Position Date Return Days Call
BKI 5/31/2011 3.02% 85 Hold
CFI 6/22/2011 -0.88% 63 Hold
SE 6/27/2011 -3.51% 58 Hold
AWR 7/5/2011 -3.64% 45 Closed
CLH 7/6/2011 -2.72% 49 Hold
GCI 7/14/2011 -22.34% 41 Hold
AGO 8/5/2011 -2.51% 19 Hold
DISH 8/10/2011 0.52% 14 Buy
NA NA NA NA NA
NA NA NA NA NA
Mousetrap Return -4.01%
S&P Return -8.47%
Hedged Return -5.61%

Mousetrap Annualized -31.31%
S&P Annualized -66.21%
Hedge Annualized -43.82%

Annualized Advantage 34.90%
Hedged Advantage 22.39%

After a good run today the Mousetrap selections are again outperforming the S&P by more than 30%. The hedged option, as I said before, will underperform on any upward moves, but XLE did not go up by very much.

Anecdotally (i.e. I have not measured or quantified this), sectors which normally lead in bull markets are leading in both volume and breadth, while bearish sectors are trailing. Short term this appears to confirm a rally, but long term this remains a bear market, with price momentum and acceleration still strongly confirming the bear.

Based on Len’s analysis, this should fade soon, and in fact he is considering this a good place to take profits off of the table.

I’m a long term timer – and long term the model will remain hedged (as in fact the full model would have done from the very first trade, since this model was in a bear configuration from the beginning of May).

Any long buys, such as DISH, must be hedged against an equal amount shorting XLE, to conform to the complete model. To put this into perspective, the XLE short from the other day has a 1.83 percent loss. From May 31, however, it would have a 16.49% gain. Although I was personally shorting the energy sector during that time, I am not including it in the model because I had not yet combined my hedging strategy into the Mousetrap as a single model. The protection I experienced as I finalized my tests shows the purpose of hedging in a bear market. One can still profit from fundamental selections in outperforming the S&P, but only if balanced against a short position which will go down as fast or faster than the S&P.

If you are not hedged – taking profits off of the table would indeed be a good thing.

Tim

[Timothy Clontz]

Condition Bear Market
S&P Target 970
Hedge XLE 0.32%

Position Date Return Days Call
BKI 5/31/2011 -1.19% 86 Hold
CFI 6/22/2011 1.40% 64 Hold
SE 6/27/2011 -5.22% 59 Hold
AWR 7/5/2011 -3.64% 45 Closed
CLH 7/6/2011 -5.95% 50 Hold
GCI 7/14/2011 -24.76% 42 Hold
AGO 8/5/2011 7.97% 20 Hold
DISH 8/10/2011 -1.42% 15 Buy
NA NA NA NA NA
NA NA NA NA NA
Mousetrap Return -4.10%
S&P Return -9.74%
Hedged Return -3.82%

Mousetrap Annualized -31.45%
S&P Annualized -74.67%
Hedge Annualized -29.31%

Annualized Advantage 43.21%
Hedged Advantage 45.36%

Tomorrow is Jackson Hole, where Ben Bernanke will confirm that the economy is not bad enough to warrant another round of Quantitative Easing. Granted, he’ll have something else he’s doing under the table, but the time for bluffing and pushing the market is over.

Expect more volatility, perhaps a strange calm for a brief while – and then the bear resumes.

XLE (energy) continues to be the short sector.

XLK (technology) continues to be the long sector.

We may still see a rally, but rallies are profit taking or shorting opportunities.

The hurricane hits my house on Sunday. I could lose power for a few days. If I don’t post right away, everyone please be safe.

Tim