Sunday, May 11, 2014

05/11/2014 Method to the madness


Style Model
Large Value
Sector Model
XLU
-1.33%
Large Portfolio
Date
Return
Days
ABX
4/11/2013
-28.24%
394
NEM
9/30/2013
-12.88%
222
RS
2/10/2014
3.18%
89
BX
4/14/2014
-4.36%
26
TIVO
4/23/2014
-2.49%
17
SHOO
4/28/2014
-6.18%
12
UNF
5/2/2014
-0.86%
8
TIBX
5/5/2014
-1.24%
5
EFII
5/7/2014
0.94%
3
CERN
5/8/2014
1.41%
2
(Since 5/31/2011)
S&P
Annualized
12.01%
Sector Model
Annualized
26.50%
Large Portfolio
Annualized
25.13%

 

Rotation: selling RS; buying PWR.

As I mentioned the other day, from here we should settle down to a once a week rotation.  There will be exceptions, of course, but the most recent trades were a reset of the model in light of the extreme bearishness in both Sector and Style configurations:

Large Value
Small Value
Mid Value
Mid Blend
Small Growth
Large Blend
Large Growth
Small Blend
Mid Growth
Utilities
1
3
6
11
13
34
39
44
73
Finance
2
5
8
14
17
41
46
49
74
Staples
4
7
12
20
22
47
52
54
75
Materials
9
18
23
31
35
55
57
61
76
Technology
10
19
24
32
36
56
58
62
77
Cyclicals
15
25
28
38
43
59
63
66
78
Industrial
16
27
30
42
45
60
64
68
79
Healthcare
21
29
37
48
50
65
69
71
80
Energy
26
33
40
51
53
67
70
72
81

 

In terms of “position” that translates to:

Small Growth
Small Blend
Mid Growth
Small Value
Large Growth
Mid Blend
Mid Value
Large Blend
Large Value
Cyclicals
 
 
 
 
 
 
 
 
 
Technology
 
 
 
 
 
 
 
 
 
Industrial
 
 
 
 
 
 
 
 
 
Materials
 
 
 
 
 
 
 
 
 
Energy
 
 
 
 
 
 
 
 
 
Staples
 
 
 
 
 
 
 
 
 
Healthcare
 
 
 
 
 
 
 
 
 
Utilities
 
 
 
 
 
 
 
 
Position
Finance
 
 
 
 
 
 
 
 
 

 

In market corrections, large caps, value stocks, and defensive industries fall less than small aggressive growth stocks.

The sector and style matrix is favoring Large, Value, and Utilities – not quite as bearish as possible, but pretty darned close.

So why not short?

Well, shorting assumes that the market will go down relative to the dollar.

But the dollar has been floating in thin air like a Looney Tunes character who has just run off the edge of a cliff.  In spite of extreme monetary policy, “inflation” has gone nowhere.

So if the market “falls” in real value, but the dollar “falls” even more, then the market will appear to go up in “price.”

Besides, it’s impossible to predict exactly when such an event may occur.

Over the past year we’ve had a VIX spike once every three to four months.  We are now three months since the last one.  Maybe we’ll get another one in the next few weeks.

Maybe not.

Far easier than timing, then, is simply rotating into those industries and styles that have been beaten down more than others, and to wait for mean reversion.  The goal isn’t to time the market, nor even to avoid any losses.  Instead, the goal is to go up more, or down less, than the market.  We can see this in the year to date returns for the Sector Model:



Timing is a fool’s errand.

Soros can do it, but Soros is a mutant.

We humans have to invest the Buffet way – look for stocks that are beaten beyond reason, and hold them until reason returns.

That kind of philosophy works for more than just the stock market, by the way.

Tim

 

 

 

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