11/26/2018 Trade Notice

The Full Model sold AEM and bought ATVI.

11/23/2018 Potential Trade

Sector Model	XLI	-3.61%
Full Model	Date	Return	Days
BT	8/11/2015	-46.59%	1200
TMK	11/23/2015	46.07%	1096
NVR	12/16/2015	49.67%	1073
CMP	2/19/2016	-22.22%	1008
NVR	2/22/2016	55.98%	1005
AMWD	3/17/2016	-3.31%	981
CASY	5/12/2016	12.38%	925
AEM	6/7/2016	-24.22%	899
ESRX	6/13/2016	25.58%	893
FRO	6/27/2016	-10.23%	879
MFC	9/1/2016	29.67%	813
SFM	9/8/2016	36.28%	806
CFFN	9/12/2016	9.67%	802
FOSL	5/11/2017	34.90%	561
HIBB	7/25/2017	31.37%	486
FOSL	7/27/2017	76.45%	484
HZO	8/1/2017	41.28%	479
BCE	5/31/2018	4.76%	176
DFS	10/21/2018	-6.88%	33
CL	10/29/2018	2.87%	25
(Since 5/31/2011)
S&P	Annualized	9.49%
Sector Model	Annualized	11.81%
Full Model	Annualized	13.05%
S&P	Total	97.01%
Sector Model	Total	130.59%
Full Model	Total	150.45%
Sector Model	Advantage	2.33%
Full Model	Advantage	3.57%
	Previous	2018
S&P	98.38%	-0.69%
Sector Model	172.95%	-10.95%
Full Model	145.63%	1.96%

With the S&P negative for the year, and the makings of a stealth bear market, the Sector Model has taken quite a beating.

What’s worse is that XLI in backtests normally precedes a bad outcome for the market over the course of the next year.

The Full Model is set up this morning for a potential trade between AEM and ATVI, provided AEM is still performing better than ATVI by the 1:00PM close.

Tim

11/9/2018 Sector Trade

The Sector Model sold XLE and bought XLI.

11/6/2018 Sector Trade

The Sector Model sold XLI and bought XLE with a positive gap (i.e. XLI was up relative to XLE).

11/3/2018 Change of Pace

Sector Model	XLI	5.29%
Full Model	Date	Return	Days
BT	8/11/2015	-44.32%	1180
TMK	11/23/2015	43.74%	1076
NVR	12/16/2015	36.15%	1053
CMP	2/19/2016	-15.69%	988
NVR	2/22/2016	41.89%	985
AMWD	3/17/2016	-4.21%	961
CASY	5/12/2016	14.54%	905
AEM	6/7/2016	-24.26%	879
ESRX	6/13/2016	27.44%	873
FRO	6/27/2016	3.43%	859
MFC	9/1/2016	33.62%	793
SFM	9/8/2016	34.65%	786
CFFN	9/12/2016	0.09%	782
FOSL	5/11/2017	63.78%	541
HIBB	7/25/2017	46.11%	466
FOSL	7/27/2017	114.22%	464
HZO	8/1/2017	67.27%	459
BCE	5/31/2018	0.53%	156
DFS	10/21/2018	-7.51%	13
CL	10/29/2018	0.17%	5
(Since 5/31/2011)
S&P	Annualized	9.94%
Sector Model	Annualized	12.11%
Full Model	Annualized	13.83%
S&P	Total	102.12%
Sector Model	Total	133.78%
Full Model	Total	161.72%
Sector Model	Advantage	2.18%
Full Model	Advantage	3.89%
	Previous	2018
S&P	98.38%	1.88%
Sector Model	172.95%	-9.53%
Full Model	145.63%	6.55%

THE PRESENT

What the heck just happened?

In simplest technical terms we nudged down to the long term regression line and bounced.  Here’s a thirty year graph:

Note the five standard deviation lines.  The top two are 2 standard deviations, and 1 standard deviation above the long term regression.  The central line is the long term regression.  We corrected down, and bounced.

We hit the long term regression line 4 and a half years ago and have been wobbling around it ever since.  I know everyone likes to debate Obama and Trump, but the graph doesn’t bear that out.  1 standard deviation is the NORMAL distance from the regression line.  That is, right now the regression is at S&P 2592.  We are slightly above that.  But “slightly” is below average.  Typically we should be S&P 3327 if Trump were some kind of genius with the economy, or 2019 if he were a moron.

The current value of 2723 isn’t either good or bad.  It’s like a cup of coffee from this morning that’s been sitting on your desk all day with a little bit of cool sludge gathered along the edge.  You can drink it, but it’s nothing to get excited about.

The current President and congress slashed regulations and taxes on corporations (short term good).  But we started a trade war (short term bad) and refused to reign in entitlements and have a nosebleed deficit (long term bad).

Given the threat of inflation with an okay economy the Fed has felt it both necessary and safe to raise rates.  Although people get scared when rates rise, it actually shows that the Fed isn’t panicking about the short term and is confident enough to deal with long term problems like inflation and debt.

THE MODELS

My Sector Model got whacked, but that’s just a benchmark anyway. 

The Full Model is holding up okay.  And in fact it’s tripped over into a shorter term holding period:

Instead of holding each position for over 5 years it is now looking at a holding period of 15 months – just long enough to comfortably avoid short term capital gains rates.

THE FUTURE


And the market?  Who knows?  It’s been hugging “normal” for 4 and a half years, through two Presidents now.  Between Obama and Trump it barely seems to matter.  The model is showing us at a market top configuration, but that can go on for a while.  If I were a market timer I’d have no idea what to do.

Since I don’t time, I’ll just yawn and move along.

I’m still planning to retire the funds I have the Sector Model benchmark and roll them into the Full Model.  With more frequent trading periods (3 weeks instead of 3 months between trades) I should be able to shrink it down to a nominal amount soon.  I’ll always have a little amount in it just to keep it valid, but the Full Model has proven itself, and that’s where the future lies.

Tim