06/23/2012 margin and stock changes

Condition	Bear Market
S&P Target	1280
Small Portfolio	IAU & XLF	4.14%
Margin (short)	XLK	5.03%
Position	Date	Return	Days
GCI	7/14/2011	4.01%	345
CSGS	10/3/2011	34.73%	264
NLY	10/25/2011	11.81%	242
KBR	10/27/2011	-17.97%	240
VG	10/27/2011	-42.86%	240
BT	1/4/2012	2.79%	171
PDLI	3/7/2012	8.91%	108
SAI	5/30/2012	7.04%	24
XEC	6/5/2012	-1.91%	18
DECK	6/15/2012	-6.23%	8
S&P	Annualized	-0.71%
Small Portfolio	Annualized	3.89%
Mousetrap	Annualized	4.66%
Margin	Annualized	9.39%

NOTE: selling PDLI and buying FCX on Monday.

ALSO: covering the 100% short position on XLK and adding a 10% long position in XLF.

Both are explained below…

Any trading system has a number of elements that need to work in harmony:

1)      The technicals (i.e. money flowing into a stock through investor interest)

2)      The fundamentals (i.e. money flowing into a company through business)

3)      Exit criteria

4)      Position size

I’ve worked on each of these in turn and have finally reached the fourth: position size.

Red is the S&P, blue is fixed, green is variable.

In tests of the basic sector model, a fixed size at 100% invested outperforms the S&P, but a variable sized position, ranging from 78-130% invested has less of a drawdown and better returns (i.e. less risk and more reward).

Back tests are one thing – and live tests are quite another.

In any case, I’ve thought long and hard about this, and there is no good way to properly apply the variable investment allocations in the Mousetrap investments.  They will remain as before: 10% of the size of the portfolio, each.

What will change is the way I report the margin.

Instead of:

Margin (short)

XLK

5.03%

It will become (on Monday morning):

10% Margin

XLF (long)

5.03%

That’s a little more information than you’ve been getting.  Right now I’ve simply been hedged: 100% long the Mousetrap stocks and 100% short XLK.  The Margin will no longer be either fully hedged or in cash, but will instead either be partially long or partially short.

If the size of my portfolio on the variable sized model is supposed to be 90%, for instance, instead of selling one of the Mousetrap stocks I would be 10% short XLK.  However, right now the variable sized model is calling for a 10% long position on Margin.

At the current price it’s actually 9.31%, but I’ll round it to 10%.

In addition I will make a mid week post on the blog to show limit order settings to add or take away from the margin position.  I’ll start with 10% increments, but I may end up doing 5% increments.  It depends on how often the margin sizes would trigger a trade.  I really don’t want to trade more than I have to.

Also, by making limit orders I can set it at night and forget about it during the day. 

Finally, on Monday I plan to sell PDLI and buy FCX, Freep't-McMoRan C&G in the MINING industry.  They’ve been slammed in the deflation scare and look like a good bargain at the moment.  PDLI is in the drug industry, and looks to have gained some price in anticipation of good news from the Supreme Court this week.  Instead of selling the news, I plan to sell before the news.

I’ll be on vacation this week.  Have a fabulous week and good luck in the market!

Best,

Tim