04/30/2012 Explanation (and Disclaimer)

Overview:

The Mousetrap is an experimental portfolio attempting to combine technical and fundamental analysis.  The method looks for positive volume divergences in 98 industry groups (as defined by Value Line), and then selects stocks within each industry based on fundamentals.

The expected holding period for each stock is a year, rotating through ten positions.

The model exists in three forms:

1)      Small Portfolio (holding two ETFs)

2)      Mousetrap (holding ten stocks)

3)      Hedged (overlaying a short ETF against the Mousetrap)

The hedged position is not always active, and will sometimes close the short position without replacing it with another.

Market Timing:

Although I do post estimates of what direction I think the market will take, I do not use aggressive timing in my investment models.  These are rotation models designed to be fully invested most of the time.

So far the only type of timing I use is an occasional hedge.

Position Sizes:

The small portfolio is designed to hold a 50% secular position and a 50% sector position.  The secular positions are meant to be held for 5-10 years, and the sector position will rotate a few times a year.  If one position becomes 50-100% larger than the other position, I will rebalance the two positions the next time one of them is rotated.

Secular Rotation:

During secular bull markets the model will hold BND (a generic bonds ETF).

During secular bear markets the model will hold IAU (a generic gold ETF).

I determine if we are in a secular bull or bear market by comparing long term price ratios of $SPX, BND, and $GOLD using 3% point and figure box sizes at www.stockcharts.com.  When gold has the best long term relative strength I will call a secular bear.  When gold has the worst long term relative strength I will call a secular bull.

Using that method we entered a secular bear in 2000.

Sector Rotation:

The nine sectors I rotate are:

XLY	Cyclicals	Bottom
XLK	Technology	Bull 1
XLI	Industrial	Bull 2
XLB	Basic Industry	Bull 3
XLE	Energy	Top
XLP	Staples	Bear 1
XLV	Services	Bear 2
XLU	Utilities	Bear 3
XLF	Finance	Bear 4

When I speak of moneyflow favoring bullish or bearish sectors, I am using an adaptation of Sam Stovall’s work on sector configurations in bull and bear markets, comparing his sector rotation theories with the moneyflow techniques created by Len Mansky – a private investor.

Disclaimer:

Since I am not a professional, the selections of the model are not a recommendation for others to buy or sell a stock or ETF.  I am only sharing my buy and sell parameters for informational purposes.  To be honest, the only person I am trying to convince to follow the methodology is myself, and going public is a way to keep myself on track.  If I can’t explain my reasons to buy a stock on a blog, I have no business investing in it in the first place.

Some sites I've found interesting:

www.stockcharts.com a free charting site

www.validea.com a subscription fundamental analysis site

www.effectivevolume.com a subscription technical analysis site