04/28/2012 Mousetrap

Condition	Bear Market	Rally
S&P Target	1250
Small Portfolio	IAU & XLF	14.64%
Hedge	XLU	-3.68%
Position	Date	Return	Days	Call
GCI	7/14/2011	6.29%	289	Hold
CSGS	10/3/2011	16.14%	208	Hold
NLY	10/25/2011	6.27%	186	Hold
DD	10/27/2011	18.48%	184	Hold
KBR	10/27/2011	18.24%	184	Hold
VG	10/27/2011	-37.99%	184	Buy
TTM	11/30/2011	78.30%	150	Hold
BT	1/4/2012	11.19%	115	Hold
PDLI	3/7/2012	2.30%	52	Hold
CLF	3/19/2012	-12.89%	40	Hold
S&P	Annualized	2.72%
Small Portfolio	Annualized	16.06%
Mousetrap	Annualized	17.97%
Hedged	Annualized	13.93%

I’m moving the Mousetrap to its own blog for a number of reasons:

1)      People should be able to go through older posts to catch up if they want

2)      It will be easier to insert images

3)      I’ll be able to post a detailed introduction to the concept for new readers

The Mousetrap model exists in three versions: small, full Mousetrap, and hedged.  The small version is simply two ETFs, right now gold and financials.  The full Mousetrap is made up of ten stocks.  The hedged position overlays a short position against the Mousetrap.

The concept itself is a hybrid technical / fundamental investment model that selects industries based on breadth and volume, and selects stocks within those industries based on fundamentals.  The ideal holding period has not yet been determined, but we appear to be close. 

The polynomial trend line for the returns on all selected positions has an apex at a holding period of 257 days, which is close enough to a year that we may be able to take advantage of long term capital gains.  Although I’ve rotated earlier positions more aggressively, I plan to hold the current ones until they reach a more mature sell point.

The goal should look something like this:

The sudden jump at 366 days shows the difference in real returns if we can hold each position for as long as a year.  The IRA return rate reflects the fact that no capital gains taxes are paid on an IRA account (at least not until one retires).

A 25% after tax return would be a successful test of the model, and a 30% IRA return would be as well.

I began this live test of the model on 5/31/2011.  At that time I did not know whether to rotate out of an existing stock when a new stock hit a buy point, or whether to hold until a natural sell point for each position.  During this beta test of the model it became very apparent that a stock should be held until it reached a sell point – but that sell point has not yet been determined.

I also included hedges for both the small and full versions of the model: with the small hedge being a position in gold and the full hedge a short position (currently shorting utilities).  At the end of this beta test I may discontinue the use of hedges, but I will not know until the test is complete and the correct sell points for the model are known.

I’ll add more detail in coming days.

Tim

For an overview of the model: http://market-mousetrap.blogspot.com/2012/04/explanation-and-disclaimer.html