07/26/2013 sector update

At yesterday's close the strongest sectors were XLU and XLK.

I sold XLB and bought XLU.

Today the strongest sectors are XLU and XLB.

07/25/2013 sector change

Intraday, the sectors changed from 1) XLB and 2) XLK,

to 1) XLU and 2) XLK.

I've sold the XLB position and bought XLU.

07/22/2013 sector model update

The sector model continues to whipsaw in the second position.

It is now XLB and (barely) XLK.

07/21/2013 The dog is chasing his tail

Sector Model	XLB & XLE	0.00%
Style Model	Small Value
Large Portfolio	Date	Return	Days
CAJ	9/25/2012	-0.64%	299
BOKF	2/4/2013	22.21%	167
ABX	4/11/2013	-31.65%	101
TPX	4/22/2013	-4.61%	90
TTM	5/6/2013	-6.83%	76
DLB	5/13/2013	-1.49%	69
MATW	6/6/2013	5.96%	45
OKE	6/17/2013	-1.78%	34
BTI	7/1/2013	3.41%	20
CLH	7/8/2013	8.02%	13
S&P	Annualized	11.23%
Sector Model	Annualized	24.49%
Large Portfolio	Annualized	30.14%

 

Rotation: selling BOKF; buying FAST.

This is an interesting one – selling a financial company in favor of one in the building supply industry.  That’s rather bullish for what is likely a late bull.

Meanwhile the sector model continues to whipsaw in the second position between XLE and XLK.  XLE is a late bull sector and XLK is an early bull sector.  In my own investments I’m only holding one position: XLB, which I’ll unload when it hits the third position in favor of whatever the new first place sector is at that time.  This avoids all whipsaws entirely.  However, the model will continue to track both sectors together – hence the 0% return listed for the current XLB & XLE combination.

But back to the market.

Most of the confusion in the market comes from trying to predict what the government will do and how it might affect the economy.  Bernanke is playing QE hokey pokey, trying to hint that QE will stop, continue, or even be reversed.  All they are trying to do is to see what kind of reaction the market will have to these trial balloons so they can guess their next move.

To make this clear, Bernanke is trying to follow a market that is trying to follow Bernanke.  NEITHER really know what to do here.  The dog will keep chasing his tail until he collapses.

I have no doubt that Barnanke’s “hints” are well known to some insiders so they can go long before a positive hint and short before a negative one.

This is a game played by people no more intelligent than we are, but with vast amounts of power.  I’m not even bothering to get suckered into their timing game.

Meanwhile, the Obama administration has announced that they will give a one year delay to the (un) Affordable Healthcare Act’s employer mandate, not understanding that businesses think further out than one year.  Obama’s problem is that he only has about 20% of the private sector experienced staff that most Presidents do: 8% against the typical 40%.  If only 8% of his staff has experience in the private sector, then it would be impossible for them to craft policy that would benefit the real economy.

This is a bubble of titanic proportions, and like the titanic it will not end well.  But it was a glorious ride UNTIL it ended.  And they played music up to the moment that the waves swallowed them whole.

There WILL come an end of this.  But predicting exactly WHEN is a fool’s errand.  And the NATURE of that end could take on any kind of destroying angel avatar one could imagine.  Deflation?  Maybe.  Hyperinflation?  Maybe.  Default?  Maybe.  The specific trades for each econo-pocalypse is different.  Guess wrong and you’ll be destroyed faster than those who don’t bother to guess at all.

I’m not guessing.  When the economy finally collapses my own trades will fall too.  But the plan is to sell the ones that fall less and buy the stocks that fall more, recovering far faster than the broad market.  If I could time the market, I would.  But timing is dependent on a market that is governed by businesses and traders, rather than one manipulated by the winds of hints that only Bernanke’s palls know in advance.  They scoop up our money as we lose on each whipsaw.

Careful readers will note that my own trades are slowing down.  By trading the first position on the sector model, holding through the second, and only selling when it hits third, my sector trades will be far less frequent than before.

The full model is also trading less.  The current trade period is once every two weeks instead of once a week.  That period will continue to expand until the full model will hold each stock for 1 to 2 years on average.  But we aren’t there yet.

Tim

 

 

07/18/2013 sector and style update

The sector model now has XLB and XLK in the first two positions.

The style model is now showing Small Value to be the best... er... value...

07/16/2013 Where Angels Fear to Tread

S&P Projection	7/16/2014	1860
Sector Model	XLB & XLE	0.08%
Style Model	Small Blend
Large Portfolio	Date	Return	Days
CAJ	9/25/2012	-0.76%	294
BOKF	2/4/2013	19.86%	162
ABX	4/11/2013	-37.77%	96
TPX	4/22/2013	-1.15%	85
TTM	5/6/2013	-8.07%	71
DLB	5/13/2013	-0.03%	64
MATW	6/6/2013	5.11%	40
OKE	6/17/2013	-0.92%	29
BTI	7/1/2013	3.47%	15
CLH	7/8/2013	5.89%	8
S&P	Annualized	11.09%
Sector Model	Annualized	24.31%
Large Portfolio	Annualized	29.94%

 

No rotation, but a couple of new features.

I’ve been experimenting with a “Style” model that looks at large, mid, and small cap; and value, growth, and blend ETFs.  This creates a grid of nine Styles, similar to the nine Sector ETFs I use in my Sector model:

Large Value	Large Blend	Large Growth
Medium Value	Medium Blend	Medium Growth
Small Value	Small Blend	Small Growth

 

The logic of this model is that the market progresses from Value to Growth, and from Small cap to Large cap as a market cycle progresses.  So, at a market bottom Small Value will predominate.  This idea is a bit counterintuitive, though, since “Large Growth” is “outperforming” in the depths of a bear market only because it’s not doing as bad as the Small Value stocks (that are getting smaller and more… er… valuable).

In any case, I’m using this as a comparison group to a timing indicator I’ve been building off the sector model.  The idea is that when they both agree there is a higher confidence of “where we are” in a cycle.  In the chart below I plot the aggregate scores of both the Sectors and Styles against a Typical market top:

In this theoretical construct, the market appears to be in a late bull – nearing a top but not there yet.  The expected value of the S&P a year from now is 1860 (as indicated in the first line above).

Although I am NOT advocating market timing, it is a matter of interest where we likely are in a cycle.  If we WERE nearing a top, for instance, we could expect the market to accelerate in a typical blow off (hence the 1860 projection).  But the sectors and styles are not YET defensive, and it doesn’t appear to be any time to panic.

Keep in mind that this is just showing normal market relationships.  With all the Fed intervention ANYTHING could happen.  This is not a market driven by the economy, but instead one driven by liquidity injections.  Any correlation with positive economic indicators is only because the economy ITSELF is also dependent on those liquidity injections.

We’re like a young woman being wooed into a marriage by a crazed lover with a credit card that WE’LL have to pay off once that expensive ring is on our finger.  Caution is warranted, but it's not time for the bride to run.

I’ve recently seen some calls to short oil, for instance.  Energy stocks tend to thrive in a blow off top, and my sector model shows both energy and basic materials to be well positioned.  I would NOT short oil here.

Tim

 

 

07/11/2013 Sector Model update

The sector model changed at the close to XLB and XLE.

07/07/2013 Yes Virginia, Evil Does Exist

Sector Model	XLB & XLU	0.90%
Large Portfolio	Date	Return	Days
CAJ	9/25/2012	-2.33%	285
BOKF	2/4/2013	19.11%	153
ABX	4/11/2013	-43.14%	87
TPX	4/22/2013	-3.30%	76
TTM	5/6/2013	-10.06%	62
DLB	5/13/2013	-1.14%	55
MATW	6/6/2013	5.40%	31
OKE	6/17/2013	-9.79%	20
TSCO	6/24/2013	7.80%	13
BTI	7/1/2013	1.71%	6
S&P	Annualized	9.62%
Sector Model	Annualized	22.17%
Large Portfolio	Annualized	28.53%

 

Rotation: selling TSCO; buying CLH.

There is chance in the market: a random randomness that can destroy any trade conceived in a human brain that has evolved to look for order in chaos and meaning in a bottomless void.

I was even privileged recently to take part in a discussion in which two dozen men theologized that evil did not exist at all.

Meanwhile 70,000 and more are dead in Syria, and folks in Egypt continue to starve no matter how many times they try to overthrow a government that is secretly run by the military with civilians only serving as front men in mock elections.

The idea is that good is substantial and that evil is not.

http://en.wikipedia.org/wiki/Absence_of_good

I’ll suggest for us humble investors, however, that there are different layers to this.  First and foremost is another ancient maxim that doctors hold as a first principle:

“First do no harm.”

In this case, “good” is the absence of evil.  It may not be the highest kind of good, but it’s better than the alternative.

So then there are four kinds of traders:

1) Those who do themselves harm.

2) Those who stop doing themselves harm.

3) Those who do themselves good.

4) Those who profit off of the harm others do to themselves.

Most of us fall in the first category.  The Mousetrap is in the second.  Buffet used to be in the third, but is trying to join Soros in the fourth.

Does that make Soros evil?  No.  Folks do themselves harm in the market without any help from Soros.  Soros merely picks up the flip side of the bad trades they insist on making.  So far as the market is concerned, Soros is neither evil nor good.  He simply recognizes something that my theologizing friends do not: evil exists, and its face is the one we see in the mirror.

There’s nothing specific here, in and of itself.  My point is that there is a WAY of looking at the different kinds of investment strategies that are out there.  Behavioral Finance, for instance, offers a tempting suspicion that there are bad behaviors in others that we could exploit to great profit.  And, while that is perhaps possible, it is infinitely easier to take the lessons there to curb our own bad behaviors so that we can stop throwing money away.

Most of us are struggling to stay out of the first category – and the thing that keeps us in that category is the delusion of being in the fourth category.  Forget it.  Right now it is the citadel of a select few, and very soon that citadel will only be inhabited by robotic black boxes that have no idea WHAT they are exploiting, only that they can make money when they do.

First, do no harm.

So, with apologies to St. Augustine, evil is NOT the absence of good.  For us, good is the absence of evil.

As for the market – I have an experimental model that needs fine tuning and further testing this week, but a preliminary view of it this evening shows that the broad market is favoring small growth stocks. 

That’s mildly bullish – enough for another pop I suspect – though not enough for a sustained major bull trend.  It’s too early to throw in the towel, and too late to take a nap in peace.

Tim