7/1/2018 Corrections create opportunities

Sector Model	XLI	-1.54%
Full Model	Date	Return	Days
BT	8/11/2015	-55.09%	1055
TMK	11/23/2015	37.59%	951
NVR	12/16/2015	79.08%	928
CMP	2/19/2016	4.63%	863
NVR	2/22/2016	86.62%	860
AMWD	3/17/2016	33.94%	836
CASY	5/12/2016	-6.34%	780
AEM	6/7/2016	-7.13%	754
ESRX	6/13/2016	1.71%	748
AMED	6/16/2016	69.63%	745
FRO	6/27/2016	-17.70%	734
ASTE	7/12/2016	3.10%	719
MFC	9/1/2016	41.40%	668
SFM	9/8/2016	12.14%	661
CFFN	9/12/2016	4.22%	657
FOSL	5/11/2017	86.08%	416
HIBB	7/25/2017	74.81%	341
FOSL	7/27/2017	143.39%	339
HZO	8/1/2017	27.61%	334
BCE	5/31/2018	3.76%	31
(Since 5/31/2011)
S&P	Annualized	10.41%
Sector Model	Annualized	13.65%
Full Model	Annualized	15.45%
S&P	Total	101.67%
Sector Model	Total	147.64%
Full Model	Total	176.76%
Sector Model	Advantage	3.25%
Full Model	Advantage	5.04%
	Previous	2018
S&P	98.38%	1.66%
Sector Model	172.95%	-1.89%
Full Model	145.63%	12.68%

The Full Model took a huge hit, falling from 19% up for the year to less than 13%.  It’s heavily invested in retail stocks, and the Sector Model is heavily invested in Industrials.  One WOULD think from the selections that the economy should be in a bullish phase, but it’s important to note the nature of the model: mean reversion instead of momentum.

In a momentum based model, the current trends are being followed.  In a mean reversion model, the previous trends are analyzed to see which trend is most likely to exhaust itself and reverse.

Although the model is normally better than a passive index stock, a true correction can still cause temporary losses.  In fact, the most bearish sector on the model is XLI, and I always grit my teeth when I see it show up.  I even tried to find ways to short the market when that sector showed up, but shorting is ultimately a losing proposition.

The general market does not like chaos, but chaos creates opportunities for selective (i.e. value) investing.  The strategy isn’t to avoid loss, but to gain more after a correction than is lost by the correction.

Tim