02/28/2013 Also Sprach Bernanke

Sector Model	XLU	36.82%
Large Portfolio	Date	Return	Days
BBRY	7/16/2012	82.76%	227
SEAC	9/25/2012	39.29%	156
CAJ	9/25/2012	3.69%	156
CFI	10/31/2012	37.53%	120
RE	11/26/2012	19.46%	94
NSC	1/28/2013	5.06%	31
BOKF	2/4/2013	4.92%	24
SWM	2/12/2013	1.61%	16
GMCR	2/19/2013	5.38%	9
OKE	2/25/2013	-4.79%	3
S&P	Annualized	6.91%
Sector Model	Annualized	19.63%
Large Portfolio	Annualized	30.44%

 

No rotation.  Just a timing note.

A lot of folks got excited when the market took a dive.  Timers piled on short.

Then Bernanke spoke.

Timers hate Bernanke.

So where ARE we?

Well, strictly speaking, I don’t time the market.  But I do measure the sectors and industries.  In my note on Sunday I said that if I were hedging I’d be about 60% long and 40% short.

After the whipsawing this week I got curious and reran the model.  This morning it is showing an ideal 70% long and 30% short portfolio.  Still not wildly long, but certainly not aggressively short either.  Just a trifle more long than it was on Sunday.

That said, the average true range of the VIX is growing (i.e. the volatility of the volatility index is rising).

If I HAD to read the tea leaves, I’d GUESS (and all anyone can do is guess nowadays) that the market will grow more volatile in a struggle to break all-time highs on more indexes.  I understand the DOW made it there, but the S&P has a wee bit more to go.

My timing expert friend, Len, is a bit more bearish in the short term.

And we could BOTH be right, since he looks at shorter time frames than I do.  I measure the market in months and he measures in weeks.  Perhaps more whipsawing.  But I wouldn’t get too excited either way.  Not yet.  If you try to time, you’d better have a darned good model and flexible stops.

For what it’s worth, these are the best long industries on my model:

ELECFGN

ENTTECH

OILGAS

BANKMID

WIRELESS

FURNITUR

GROCERY

AUTO

NWSPAPER

GASDIVRS

REINSUR

GOLDSILV

EDUC

ADVERT

 

…and these are the best industries to short:

 

PROPMGT

BIOTECH

ITSERV

DIVERSIF

CABLETV

PIPEMLP

 

Fasten on to your seat belts.  The sequester is nothing compared to the next crisis due to hit at the end of March.

Tim

 

 

02/24/2013 the model has outgrown the blog

Sector Model	XLU	38.96%
Large Portfolio	Date	Return	Days
BBRY	7/16/2012	81.79%	223
SEAC	9/25/2012	41.86%	152
CAJ	9/25/2012	4.36%	152
CFI	10/31/2012	35.67%	116
RE	11/26/2012	18.46%	90
CGX	12/12/2012	8.14%	74
NSC	1/28/2013	5.65%	27
BOKF	2/4/2013	6.28%	20
SWM	2/12/2013	3.14%	12
GMCR	2/19/2013	2.57%	5
S&P	Annualized	6.95%
Sector Model	Annualized	20.83%
Large Portfolio	Annualized	32.41%

 

Rotation: selling CGX; buying OKE (again).

I’ve been making some improvements to the model that will not appear on the blog selections, but they are worth discussing.

First, after years of persistent nudging from a friend, I’ve finally worked out how the model can be used on the short side as a hedge.  The results of a fifteen year back-test confirmed the procedure, and I’m planning to pursue these improvements – but not on this blog.  The blog itself is designed for folks with cash accounts that they don’t need to spend a lot of time managing.

And that brings me to the second part of this week’s missive: time.  Or more specifically, holding periods.

 

Those of you who’ve endured a few weeks of my tax posts will be aware of the problem with the change in capital gains taxes.  They used to be 35% short term and 15% long term.  Now they are 43.8% short term and 23.8% long term.

That change shifts the realized gain calculations of the model enough to trip the holding periods for a taxable trading account into a long term rotation pattern.  Instead of rotating once a week, a taxable account would rotate 1 of the 10 stocks once every two months.

The net effect for the government is that instead of getting the 35% they used to get every year, they’ll get 23.8% every two or three years (i.e. about 10% per year).  By raising rates they’ll cut their revenue to about a third of what they got before.

The capital gains rates had already been optimized for maximum government revenue at the 35% and 15% levels.  ANY change, whether down or up, would get less revenue.  For those concerned with paying off the national debt, BOTH Romney’s proposed cuts and Obama’s proposed raises would bring in less money.

For the investing public this will be an unconscious process – those who trade less often will be left with most of the money.

For my model, it’s a deliberate formula to maximize realized after-tax gains.

The details of the calculations include which portion of gains are dividends and which is from the sale of price appreciation.  Also included is the size of the account (for the impact of trading costs).  Right now it’s set for my own account (for obvious reasons). 

The question for the blog is – which do I report?  For now I’ll continue the weekly rotation, but a person with a taxable account could do better by only trading once every two months and ignoring 7 out of 8 of those weekly stock picks.  The only problem with that idea is the second crucial aspect of a trade: WHEN TO GET OUT.  The blog will calculate when to get out of a weekly rotation.  I don’t plan to do so for a slower one (not here).

So that leaves me with far too many variables to take full advantage of in a little blog.  The blog is set for a long only IRA account – no margin, no taxes, and no shorting.

What is possible (beyond the blog) is a self-adaptive long/short hedged portfolio calculated for maximum total returns after taxes and trading costs, specifically balanced for both the size of the account and the tax exposure of the client base.

It would not just be targeting OKE on the long side, for instance – but also targeting CHTR on the short side.

But that’s more than will fit here.

The model has grown far more robust than I had imagined when I launched it on 5/31/2011.

I feel like giving it a graduation prize.

I would add that the enhancements will give me a bit more insight than I’ve had before.  A hedged model, for instance, would be about 40% short and 60% long at the moment.  That’s more “bullish” than is currently in the news with the sequestration scares and panic over Walmart’s February sales.  And, while the model could be wrong, it’s usually better than the scare tactics and bullish fantasies that we find on the front page.

Tim

02/18/2013 market is asleep

Sector Model	XLU	36.57%
Large Portfolio	Date	Return	Days
BBRY	7/16/2012	95.31%	216
SEAC	9/25/2012	41.86%	145
CAJ	9/25/2012	3.17%	145
CFI	10/31/2012	45.39%	109
RE	11/26/2012	15.69%	83
CGX	12/12/2012	4.72%	67
OKE	12/28/2012	14.13%	51
NSC	1/28/2013	3.32%	20
BOKF	2/4/2013	2.98%	13
SWM	2/12/2013	4.03%	5
S&P	Annualized	7.35%
Sector Model	Annualized	19.87%
Large Portfolio	Annualized	33.52%

 

Rotation: selling OKE; buying GMCR

OKE is in the OILGAS industry.  GMCR (Green Mountain Coffee) is in the Grocery industry.

In broad sector terms, OKE is in the energy sector, while GMCR is in the consumer staples sector.

This is a bearish move for the model.

Keep in mind that these are very incremental moves from one week to the next.  If the moves begin to form a pattern it can reveal a potential trend change.  Last week the move was bullish.  This week the move is bearish.

More to the point, GMCR is showing a consumer staple move for the full Mousetrap model.  But (what’s not visible above) consumer staples is weak on the abbreviated sector model.

Short answer: there is no significant pattern here.  These are just tiny rotational moves.

The market is wildly overbought by most technical readings, but there is no visible change in direction looming on the model.

I’d report something interesting if there was something interesting to report.  Perhaps what IS interesting is the complete lack of direction just a few days before the sequester hits.  It’s as if nothing at all is going to happen, and perhaps that’s what everyone out there is expecting.  We’ve been faked out so many times that we don’t believe anything anymore.

It’s TOO quiet out there.

Maybe the coffee will wake us up.

Tim