11/23/2014 Five Million Immigrants Isn't Enough

Sector Model	XLF	1.55%
Large Portfolio	Date	Return	Days
SR	6/2/2014	-15.51%	173
ESI	8/4/2014	-38.23%	110
STRA	8/18/2014	28.55%	96
PBI	8/25/2014	-6.56%	89
KFY	9/29/2014	3.57%	54
IQNT	10/6/2014	42.08%	47
EDU	10/27/2014	-0.04%	26
PLT	11/6/2014	-1.31%	16
BKE	11/10/2014	2.12%	12
CPSI	11/17/2014	-4.50%	5
(Since 5/31/2011)
S&P	Annualized	13.08%
Sector Model	Annualized	25.84%
Large Portfolio	Annualized	22.91%

 

Rotation: selling PBI; buying AP.

After selling CLF last week, the steel industry took a nosedive and came back into the model’s buying window.  AP is losing money at the moment, but has low debt and low price to book value.

Once again we are looking at “value” in terms of “worth more dead than alive.”

Oh well.

The specific industries represented in the buy window continue to be a confusing mix:

EDUC

ELECEQ

ELECTRNX

FUNL SVC

HLTHSYS

HUMAN

INSLIFE

MARITIME

SEMI-EQP

STEEL

WIRELESS

 

Bull or Bear?

Maritime is an interesting choice – indicating a potential bottoming in commodities.  It gives some comfort to the selection of AP.  But the price action on CLF after the sale makes my head spin.  Even with the 13% spike on Friday, it’s down for the week.

The Sector Model is struggling to find a new high, trailing the broad market for the week:

 

Regular readers of the blog can see the back-test results for the Sector Model.  Those back-test numbers are the basis for the blue benchmark line on the graph.

Now – this benchmark is just a rolling average for all returns during the total period of back-tests and live trading added together.  It does not account for the variable advantage rates the model shows in different kinds of markets.

Using correlations from the back-tests, for instance, we can construct an expected advantage for the model given any set of hypothetical S&P yearly returns:

SPY%	Sector%	Advantage%
50%	57%	7%
40%	49%	9%
30%	40%	10%
20%	32%	12%
10%	24%	14%
0%	16%	16%
-10%	7%	17%
-20%	-1%	19%
-30%	-9%	21%
-40%	-17%	23%
-50%	-26%	24%

 

The take away here is that the worse the broad market does, the better the model looks.  Graphically this would be:

In a bear the model would still lose money – but not as much as the S&P. The worse the market gets, the greater advantage the model gains.

The hardest part, of course, is holding on during those market downturns.

The reason I’m saying this, of course, is to keep myself calm during a rather concerning sector ratio alignment:

In spite of the zero interest rate policy, we have to keep in mind that the far larger demographic trends are bearish, with another likely downturn starting next year.  These demographics don’t start to ease until after 2018.

The only short term solution would be… immigration.

Now don’t get excited.  We’ve killed off about 57 million babies since 1973.  Legalizing 5 million parents with American born babies isn’t enough to fix it.

Tim