10/28/2012 rotation: selling AM; buying CFI

Small Portfolio	XLF & IAU	16.99%
Position	Date	Return	Days
DECK	6/15/2012	-38.57%	134
RIMM	7/16/2012	4.41%	103
OKE	9/25/2012	-1.40%	32
SEAC	9/25/2012	10.04%	32
CAJ	9/25/2012	-6.16%	32
DDAIF	9/25/2012	-8.40%	32
SSD	9/25/2012	-0.30%	32
AM	9/25/2012	16.51%	32
NSC	10/8/2012	-6.17%	19
WMK	10/22/2012	0.17%	5
S&P	Annualized	3.52%
Small Portfolio	Annualized	12.05%
Large Portfolio	Annualized	15.13%

 

Scheduled rotation: selling AM; buying CFI.

AM is in the Publishing industry, and CFI is in the Furniture industry.  Although AM has been a profitable trade, and may become more profitable still, it’s also a great opportunity for profit taking and repositioning into a technically stronger industry.

The move into Furniture is related to the SSD position in the Building industry.  More indication that the efforts of Bernanke to back mortgage related securities are gaining traction.

The CFI position also represents the first stock selection using the new adaptive fundamental model, which will gradually fine tune the fundamentals that are most synergistic with the technical environment targeted by the Mousetrap.

The first adaptation is to add an examination of long term Growth Persistence.  A stock with seemingly good fundamentals has less of a chance of being a value trap if it has persistent earnings growth.  That’s not fool-proof, of course, since of all the stocks on the NYSE, DECK is considered the best value by the model.  That MAY be true NOW, but it was certainly something of a value trap when I entered the position five months ago.

In any case, the adaptive model will slowly update the fundamental selection process until it reaches a (hopefully more profitable) equilibrium.  Although the model is outperforming the S&P by an 11-12% annualized rate, I think it can do even better with these steady adjustments.

Time will tell.

Tim