05/26/2013 The Crystal Ball is Always Green

Sector Model	XLB	3.97%
Large Portfolio	Date	Return	Days
BBRY	7/16/2012	99.72%	313
CAJ	9/25/2012	5.26%	242
BOKF	2/4/2013	16.60%	110
SWM	2/12/2013	30.76%	102
MWW	4/11/2013	16.52%	44
ABX	4/11/2013	-21.67%	44
TPX	4/22/2013	-6.37%	33
TTM	5/6/2013	-3.87%	19
DLB	5/13/2013	0.64%	12
GMCR	5/24/2013	-1.41%	1
S&P	Annualized	10.82%
Sector Model	Annualized	25.83%
Large Portfolio	Annualized	32.05%
	YTD
S&P	15.67%
Sector Model	24.23%
Large Portfolio	18.43%

 

No rotation.

As you can see, the year to date performance of the sector model is again outstripping the full portfolio.  Meanwhile the Mousetrap continues to evolve, and the fundamentals are increasingly moving toward larger companies.

That makes sense, in light of the outperformance of the sector model, since the sector ETFs are cap weighted indexes.

It also makes sense as a trend continues to mature and as retail investors pile into stocks.

Of further note is the fact that the fundamental filters are beginning to make more sense from a classical value perspective.  These are right at the top of the selections:

Cash Flow Growth 5-Year	High
Sales Growth 5-Year	High
EPS Growth 5-Year	High
Est EPS 1st Qtr Out	High
Est EPS 2nd Qtr Out	High
Total Return 1-Year	Low

 

That translates to three things:

1) Earnings have usually been good in the past, and are

2) estimated to be good in the future, but

3) the price is depressed right now.

That’s simpler than what the model was spitting out before.

Heck, even Buffet could do that.

As for the market, I can’t say what it’s GOING to do.  I can only comment on what it seems to THINK it’s going to do.  It THINKS it’s going to go back to its long term median regression.  That would take the current trend above 2000 in mid-2015.

Keep in mind that the market thought it would ride the long term regression back in 2007 too.

A regression is great for estimating what the market will do a few business cycles out, but can’t tell you anything about the next few months.  It’s like that Shiller Yield I graphed a few weeks ago: fantastic for estimating ten year returns, and worthless in any shorter time frame.

The ONLY meaningful use of the Shiller Yield is to compare regional indexes for long term opportunities.

But don’t use long term estimates to predict the short term. 

And for goodness sake, don’t use the news!

99% of the market news articles have no idea what they are saying in terms of tradable calls.  I know this because they usually tell me what I’m thinking myself, and my brain can’t time its way out of a paper bag.

News articles have only one true goal – to sell news articles.

It’s like politicians – their only goal is to get re-elected.

Or judges – their only goal is to keep from being overturned.

So, news articles will write what you want to read; politicians will do what their donators demand; and judges will adjust justice in favor of whoever has more money to pay for appeals.

They don’t even pretend to be interested in truth, justice, or the American way.

What they ARE interested in, is money: news sales, political contributions, the richest litigant.

If you want to predict the future, you only need to do one thing: follow the money.

Investing works the same way: stocks make money when businesses make money. 

End of story.

Tim

 

05/24/2013 premarket: selling NYCB; buying GMCR

Sector Model	XLB	4.33%
Large Portfolio	Date	Return	Days
BBRY	7/16/2012	99.03%	312
CAJ	9/25/2012	8.26%	241
BOKF	2/4/2013	15.90%	109
SWM	2/12/2013	29.83%	101
MWW	4/11/2013	18.53%	43
ABX	4/11/2013	-20.07%	43
TPX	4/22/2013	-7.76%	32
NYCB	4/24/2013	2.56%	30
TTM	5/6/2013	-0.98%	18
DLB	5/13/2013	-0.38%	11
S&P	Annualized	10.87%
Sector Model	Annualized	26.09%
Large Portfolio	Annualized	32.51%

 

Rotation: selling NYCB; buying GMCR.

Remember, this trade will NOT happen if NYCB is down relative to GMCR throughout the day.

Tim

05/19/2013 No, some things do NOT make sense

Sector Model	XLB	5.74%
Large Portfolio	Date	Return	Days
BBRY	7/16/2012	101.66%	307
CAJ	9/25/2012	7.85%	236
BOKF	2/4/2013	17.87%	104
SWM	2/12/2013	26.56%	96
MWW	4/11/2013	14.96%	38
ABX	4/11/2013	-24.04%	38
TPX	4/22/2013	4.11%	27
NYCB	4/24/2013	3.61%	25
TTM	5/6/2013	4.66%	13
DLB	5/13/2013	0.35%	6
S&P	Annualized	11.53%
Sector Model	Annualized	27.16%
Large Portfolio	Annualized	33.67%
S&P	Total	23.96%
Sector Model	Total	60.47%
Large Portfolio	Total	77.05%
Sector Model	Advantage	15.63%
Large Portfolio	Advantage	22.14%

 

Since 5/31/2011, the large portfolio of ten stocks has risen 77.05%.

On an annualized basis (just shy of two years), that’s 33.67% per year, which is a 22.14% advantage over the S&P.

On January 1, the model had a total return of 46.63%.

Year to date, then, the model is up 20.74%.

No bragging points; the entire market has been on a tear.

And that leaves us to the question of what the market sectors are telling us.

Sam Stovall has a graphic of the sector rotations embedded in a typical market cycle:

http://stockcharts.com/freecharts/img/SectorCycle.jpg

On this graphic I’ve mapped the stocks that the model has selected to their native sectors:

On the left hand side is a bull market.  On the right side is a bear.  The model appears to be targeting bullish sectors by a factor of two to one.

The average spread of ALL stocks in the model centers on a market bottom.

I mentioned this a few days ago, and I need to elaborate.  For the past two years, anyone looking at sector relationships would have been bearish almost the entire time.  For months I even listed the model as indicating a bear market, even though the market was going up almost the entire time.  I kept getting questions about it, and after the twentieth time explaining that this was some kind of extended bear market rally, I finally shrugged my shoulders and stopped listing it on the blog.

But I kept watching it, with almost a morbid curiosity, as the sectors SLOWLY ground their way from a bear market top to a cyclical bottom – which is where the model is now.

This market has been a disaster for most hedge funds, with good reason: the market hasn’t made any technical sense, outside of QE.  This has been Bernanke’s market the entire time.

In six months Bernanke will be exiting stage left, and QE will likely take a bow with him.

And yet the market is accelerating.

I believe, as I noted a few days ago, that we are entering a self sustaining cyclical bull market which will last until 2016 (earliest) to 2018 (latest).

The cause is demographics, as noted here:

http://market-mousetrap.blogspot.com/2012/10/1032012-before-debate.html

and here:

http://market-mousetrap.blogspot.com/2013/05/05172013-quantifying-bernanke.html

The PROBLEM is whether these numbers can have any solid meaning in this environment of competitive currency devaluation.  If Bernanke has been able to turn a bear market into a four year rally, will his exit turn a bull market into a four year correction?

I don’t know.

No one knows.

Bernanke doesn’t know.  That’s why he’s happy to retire.  He’s done his job.  Now it’s up to our dysfunctional government to begin to do their job instead.

My model has been long a bear market that went up, and will be long if we have a bull market that goes down.  In a world turned on its head, traditional market timers will lose money to us dumb clods who pick undervalued stocks and grit our teeth through market gyrations cooked up in an LSD phantasm.

My point is this: don’t TRY to over-think this.  Some things do NOT make sense.

Ned Davis asked a question we should always keep in mind: “Would you rather be right, or make money?”

Most of us, believe it or not, would rather be right.  It’s not that we don’t WANT to make money, but that we want an excuse to blame when we DON’T.

Tim