4/28/2016 Mouse Trade

The Mouse sold XLU and bought XLE before the close.

4/26/2016 Rabbit and Mouse update

The Rabbit closed the position on CMP and opened a new position in AMWD with a 5.5% favorable gap.

The Mouse did not get a favorable gap this morning, and the call reverted to XLU, so there was no trade and the Mouse will continue to hold XLU.

4/25/2016 Sector Change

I was away from the computer at the close.

XLE has edged out XLU, and if there is a positive gap in the morning I'll make the trade.

4/18/2016 Observations

So how are we doing?

I’ve been laying quiet for a while as this earnings recession has continued. The stock picking disaster of last year has subsided, and this year has clarified a few observations about each version of the model.

Turtle

There does indeed appear to be a long term holding period advantage for taxable accounts that can function well with the model. This has been incorporated into the Turtle model.

On the following graph the Turtle seeks to optimize the after tax return rates represented in the green line, while the Rabbit seeks to optimize the non-tax return rates represented in the blue line:

As can be seen, long term capital gains taxes have a negligible effect once we stretch into 4-5 year holding periods. But there is an additional advantage of these long holding periods – it is infinitely scalable in either direction. Long term holding periods have very little trading cost impact on a small account, and large accounts can creep into a stock of any size without creating price distortions on the trade. A person with a few thousand and a person with a few billion could trade the same model with the same expected results.

Rabbit

During late 2014 into 2015 I attempted to combine two ETF models into a single fundamental selector on the Rabbit. Those two models were the Sector model and the Style model. When the Sector model called for Utilities and the Style model called for Small Value, I attempted to select a Small Value Utility stock.  Seemed like a good idea at the time. The result was a disaster.  The model, which began last year on par with the Sector model, suffered a collapse which brought it back down to the return rate of the S&P 500.  Although tracking an index is not a complete catastrophe in terms of investment models, it was a supreme failure for my own goals. Accordingly, the Rabbit seeks out small stocks with low debts and high earnings. It is recovering from last year, but has a way to go.

Mouse

The Sector model is now nick named the Mouse. It is the technical core of the other two models and simply trades ETFs. The Mouse is trading extremely close to its long term regression line:

That is, the back tested results back to the end of 1998 and the live traded results from mid-2011 are extremely consistent.

The Mouse holds up. Those trading small accounts would be best served holding the ETF. Those with larger accounts might want to trade the constituent stocks represented by the ETF, as long as they make sure to cap-weight the account. The advantage of cap-weighting is that those stocks with the greatest liquidity and least price distortion on the trades will also be hit with the greatest proportion of the account.

Cycles

Finally, we get down to the question of market timing. Back on 7/5/2015 I posted “Enter the Bear” to note that we had entered a bear market configuration.  This was just before the disaster on the Rabbit hit full force, and it’s impossible to say how much the Rabbit would have withstood that bear in it’s current fundamental selection process.

The Mouse, however, DID withstand that bear configuration (at least so far).  At the time of the call the Mouse had a total return since 5/31/2011 of 97.50%.  Today that total return is 111.11%.  Granted, the earnings bear is not yet over, but the past nine months illustrates why I don’t use the model to time – money doesn’t just drift out of the market. Instead, it shifts around.

The Rabbit did take a hit, of course, but we’ll have to wait till the next bear configuration to see how much of that was a problem of stock selection DURING a bear, and how much stock selection in my failed attempt to combine two models which most likely had negative synergy.

In any case, the bear configuration is still in effect:

 

Be cautious, but don’t panic.

Final numbers

And now, at last, are my final numbers – the good, the bad, and the ugly.

Mouse	XLU	-0.94%
Rabbit	Date	Return	Days
BT	8/11/2015	-11.07%	251
TM	8/12/2015	-19.63%	250
DY	10/30/2015	-11.95%	171
TMK	11/23/2015	-7.76%	147
NVR	12/16/2015	7.42%	124
CBI	2/12/2016	13.35%	66
ORA	3/14/2016	2.30%	35
TRP	3/22/2016	6.90%	27
CMP	3/30/2016	0.10%	19
MATX	4/12/2016	6.04%	6
Turtle	Date	Return	Days
BT	8/11/2015	-11.07%	251
TM	8/12/2015	-19.63%	250
DY	10/30/2015	-11.95%	171
TMK	11/23/2015	-7.76%	147
UPL	12/1/2015	-86.78%	139
OKE	1/20/2016	56.49%	89
CMP	2/19/2016	6.31%	59
NVR	2/22/2016	11.95%	56
ENOC	3/15/2016	-3.01%	34
AMWD	3/17/2016	13.42%	32
	Since 5/31/2011	Annualized
S&P	54.68%	9.34%
Mouse	111.11%	16.53%
Rabbit	57.26%	9.71%
Turtle	66.90%	11.06%
	Previous	YTD
S&P	51.94%	1.80%
Mouse	77.79%	18.75%
Rabbit	57.21%	0.03%
Turtle	58.35%	5.40%

 

The Mouse wins this business cycle.

Once the new bull market begins the race will continue.

And as for the daily news and the political cycle? Ignore them. Buffett does.

Tim

 

 

 

 

 

 

 

 

4/11/2016 Rabbit Trade

The Rabbit sold NWBI and bought MATX with a favorable gap before the close.