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.