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