1/28/2016 Mouse Trade

The Mouse sold XLE for a quick profit and bought XLU before the close.

1/26/2016 Potential Whipsaw

The Mouse sold XLU and bought XLE right before the close.

1/25/2016 Rabbit Trade

The Rabbit sold ENB.TO (actually ENB) and bought ROCK with a 1.5% favorable gap.

1/24/2016 "Long Term" is Something You Decide Ahead of Time

Mouse	XLU	1.62%
Rabbit	Date	Return	Days
BT	8/11/2015	-1.43%	166
TM	8/12/2015	-10.12%	165
DY	10/30/2015	-15.29%	86
CVS	11/6/2015	-3.49%	79
TMK	11/23/2015	-12.07%	62
UPL	12/1/2015	-38.90%	54
NVR	12/16/2015	-6.88%	39
SPG	12/28/2015	-3.62%	27
ENB.TO	1/7/2016	6.37%	17
FSLR	1/20/2016	8.05%	4
Turtle	Date	Return	Days
BT	8/11/2015	-1.43%	166
TM	8/12/2015	-10.12%	165
MMP	9/4/2015	-10.99%	142
DY	10/30/2015	-15.29%	86
CVS	11/6/2015	-3.49%	79
TMK	11/23/2015	-12.07%	62
CLF	11/30/2015	-31.90%	55
UPL	12/1/2015	-38.90%	54
GPRE	1/6/2016	-20.31%	18
OKE	1/20/2016	20.73%	4
	Since 5/31/2011	Annualized
S&P	41.76%	7.79%
Mouse	85.69%	14.23%
Rabbit	54.21%	9.76%
Turtle	55.65%	9.98%

It’s not just the drop that drives us crazy, but the gyrations.  Just when we think it might be over, we’re set up for another fall.  And then when we think the end is nigh, we get a face-ripping rally. If we were on a roller coaster we’d only be losing our lunch.  In the stock market we have a lot worse things to lose.

The Mouse had a fantastic 2014, and a horrific 2015. Between the two years the model made nothing, but it was a painful round trip. 2016 has fared better – so far. The S&P is down -6.70%, and the Mouse is up 4.45% -- for better than an 11% advantage in just three weeks.  A whole year of that and we could retire, but that’s not the way life works.

To retire most folks could invest 15% of their income in small caps in their 20s, and not even look at the account until their late 50s when they can rotate the lot into some kind of targeted retirement fund. I say, “could”, of course, because such a person would truly have to save consistently without looking at the portfolio and panicking.  Such folks are few and far between.

The rest of us THINK we can avoid panicking, and we succeed in holding on all the way down, only to sell at the bottom.

I once sold off a huge investment at the exact day, hour, minute, second – and PENNY – of the bottom. I knew at the time that I was likely to do so, but I couldn’t stand the pain any longer, and so I locked in my losses, went back to work, and at the end of the day realized it had already rallied over 10% (and it continued to go straight up, without me, for years).

When most financial analysts calculate risk, they are actually calculating the amount of volatility a portfolio has. My own models seek out volatility and invest in the most frightening sectors and industries. Small caps are also more volatile than large caps. In the long run, such portfolios will outperform. But the problem for most investors is that they get shaken out in the extremes.  They’ll wait until a sharp rally and invest at the top, and then cash out after a fall. The average “trader” loses money with winning stocks.

The key isn’t to get rich next week, but to be able to retire with some sanity when we can no longer work. To do this, looking at recent trends won’t be of much help. Energy stocks are at a generational low, and XOM is three standard deviations below its long term regression:

To put this into perspective, the entire record of XOM has NEVER seen this kind of discount. Three standard deviations is only broken about 11% of the time.  That means that XOM has an 89% chance of rising from here – for life.

Now, any stock can go to zero, but even XLE (the energy ETF) is close to three standard deviations below its long term regression. I do have one position in XOM that’s not listed on any of my models. It’s parked there, for life.

Right now, both energy and small caps are trading at an extreme long term value. When seemingly nothing can go right short term, that is the exact time that almost nothing can go wrong long term. When looking for extreme long term value, follow the fear.

But don’t follow the fear for short term plays.

And don’t, don’t, don’t – do not ever – convince yourself that you are a long term trader. “Long term” and “trader” are contradictions in terms. All that will happen is that you’ll hold on until you’ve hit the bottom and then sell. Make up your mind before you buy, not after something you bought has crashed and you can’t bear to sell (until you can’t bear to hold any longer).

Again, a long term play is decided before you buy, for reasons that make sense long term.

Tim

1/22/2016 Sector Ratios Back to Defense

The broad market is again favoring defensive sectors over bullish ones.

The Mouse remains in XLU into the close.

1/21/2016 Mouse Trade

Nice profit in XLE today, and the Mouse sold XLE to buy XLU before the close.

1/20/2016 Mouse Trade

The Mouse sold XLU and bought XLE.

Could get slammed, but the ratio of all sectors has tilted in favor of a broad market bounce.

1/20/2016 Turtle Trade

The Turtle sold WM and bought OKE with a 6% favorable gap.

This completely closes the WM positions.

1/20/2016 Rabbit Trade

The Rabbit sold WM and bought FSLR with a 3% favorable gap.

The Turtle continues to hold WM.

1/11/2016 End of Year Numbers

(Since 5/31/2011)
S&P	Annualized	9.55%
Mouse	Annualized	13.36%
Rabbit	Annualized	10.36%
Turtle	Annualized	10.54%
S&P	Total	51.94%
Mouse	Total	77.79%
Rabbit	Total	57.21%
Turtle	Total	58.35%
Mouse	Advantage	3.81%
Rabbit	Advantage	0.82%
Turtle	Advantage	0.99%
	Previous	2015
S&P	53.06%	-0.73%
Mouse	142.84%	-27.55%
Rabbit	101.13%	-21.84%
Turtle	101.13%	-21.27%

The yearly returns for all models were catastrophic this year.

I was in good company, since this was the worst year for asset allocation in 78 years.  A good number of hedge funds attempted to open new investment options in order to keep from losing business, but most of it will be smoke and mirrors. Nothing worked this year.  That happens.  It was the worst year for the model too, and drove the performance advantage since 5/31/2011 to 12/31/2015 to almost nothing.

There’s nothing to do but ride it out, and so far this year the broad market is down more than my own funds – which are finally gaining some traction; too late for last year, but welcome in this year.

Breadth in the broad market is wildly negative, and only a handful of stocks have kept the S&P afloat.  That kind of discrepancy cannot continue, and we will either have a bear market in the large cap weighted indexes, or a roaring bull market in small caps.

If I were a prophet I’d be better off than the current PowerBall value of 1.3 billion.  As it stands I’m just an investor who’s had a really bad year.

On average I’ve done better.

And on average I’ll do better again.

The good thing about those “worst in 78 years” events is that they don’t happen every year!

Tim

1/7/2016 Rabbit Trade

The Rabbit sold APD and bought ENB.

1/6/2015 Turtle Trade

The Turtle sold ED and bought GPRE with a 6.5% favorable gap.