Condition Bear Market
S&P Target 970
Hedge XLE -2.25%

Position Date Return Days Call
BKI 5/31/2011 -0.16% 95 Hold
CFI 6/22/2011 2.24% 73 Hold
SE 6/27/2011 -3.85% 68 Hold
AWR 7/5/2011 -3.64% 45 Closed
CLH 7/6/2011 -3.45% 59 Hold
GCI 7/14/2011 -23.29% 51 Buy
AGO 8/5/2011 2.09% 29 Hold
DISH 8/10/2011 9.83% 24 Hold
NA NA NA NA NA
NA NA NA NA NA
Mousetrap Return -2.53%
S&P Return -8.72%
Hedged Return -4.50%

Mousetrap Annualized -16.64%
S&P Annualized -57.41%
Hedge Annualized -29.60%

Annualized Advantage 40.77%
Hedged Advantage 27.82%

Just a word about “doubling down” on a stock that has lost a good deal and looks like it’s an even better buy. As tempting as it may appear, layering into a stock that is losing money, while a typical fundamental investment practice, is not something I would do here.

Sometimes a stock loses money and keeps losing money in defiance of its fundamentals – only to have the fundamentals later change to confirm the downward spiral. This is one of the core differences between a technical trader (who follows the theory that price movements predict future fundamentals), and a fundamental trader (who follows the theory that fundamentals predict future price movements). When a stock falls below a certain threshold a technical trader will dump the stock for a stop loss, and a fundamental trader will put more money into the stock.

The question is what to do in a hybrid fundamental /technical model. Do you take money out or put money in?

In the case of the current model, I am doing neither. There IS a “stop loss” position on the model, but it is currently occupied by the Thrift industry. SE, which is only down 3.85% at the moment, is actually closer to the stop loss position than GCI.

In any case, the model is hedged. Currently the long-only option is out-performing by better than 40%, while the hedged option is only out-performing by less than 30%. I expect these two options to switch positions in a renewed downtrend.

Yes, GCI is the buy, but a discretionary trader should consider waiting unless entering a short hedged position at the same time to offset the likely retest of the August lows.

Tim