06/17/2013 intraday sector note

The sector model continues to whipsaw.  XLU is now in first place, with XLB in second.

The actual difference in the returns between the first and second positions is negligible, and so it's not essential to chase all of the whipsawing.

06/16/2013 Blindside

Sector Model	XLB	-0.72%
Large Portfolio	Date	Return	Days
CAJ	9/25/2012	-5.00%	263
BOKF	2/4/2013	13.03%	131
SWM	2/12/2013	40.58%	123
MWW	4/11/2013	19.87%	65
ABX	4/11/2013	-19.42%	65
TPX	4/22/2013	-4.26%	54
TTM	5/6/2013	-4.77%	40
DLB	5/13/2013	-1.63%	33
GMCR	5/24/2013	7.47%	22
MATW	6/6/2013	0.29%	9
S&P	Annualized	9.75%
Sector Model	Annualized	24.11%
Large Portfolio	Annualized	30.81%

 

Rotation: selling MWW; buying OKE.

This will be the fifth time trading OKE, and it’s a bit of a wild card.  Of the first four trades, two were profits and two were losses.

The market itself is a bit of a wild card, to be honest.  A look at the market news stories these last few weeks has been a tug of war between euphoria and despair.  Hussman is calling a market top for the bazillionth time, while Dr. Doom Roubini is bullish.

This is not a normal market.  Never before has technology been coupled with artificial intelligence.  Robots are not just machines, but something else entirely.  And we are not only competing with them for our jobs, but in our investment decisions as well. Think technology squared.  Added to that we have a dysfunctional political environment and a central bank trying experiments never ventured in this country’s history.

Blissfully unaware of all these massive exceptions from the rule, the market moves, as always, in its natural logistical curves:

http://en.wikipedia.org/wiki/Logistic_function

The basic idea is that the market is always after some kind of moving target, and each day, week, month, year, it randomly moves up or down based on two percentage factors: 1) its current position and 2) the position of that moving target.  It may not HIT that target, but it always has one in mind.  For instance (using a simpler method to approximate the idea), the current target is likely in the 2050 range on the S&P, around the beginning of 2015:

On this chart I plotted a linear regression for the entire 1950-present period, and another from the March 2009 low-present, and extended both lines forward.  They cross around 2050 by the end of January 2015.

That’s where the market THINKS it is going.

And the market THINKS it would be natural and normal to get there – regardless of how unnatural and abnormal the true economy is.

Keep in mind that no technical trick can plot an exact date or price of where the market WILL be – only where the market THINKS it will be.

Now look at that chart a bit closer: 

Notice that the further apart the two regression lines are, the greater the size of the cycles.  As the two linear regressions fall closer together, the size of the market swings subsides.

But here’s the caveat: if the market truly belonged where it THINKS it belongs, we’d ultimately subside into zero volatility in a single straight line.

And we all know that will never happen.

There is a long term standard deviation of the market, and the less it deviates in the short term, the more it will deviate in the future to make up for it.  What’s happening is that as investors get more and more fixated on where the market THINKS it is going, the more they ignore other reasons for it to be a different value altogether.  This is a natural filter we have that is well documented:

http://www.scientificamerican.com/article.cfm?id=your-hidden-censor-what-your-mind-will-not-let-you-see

In investment terms, the more convinced you are, the less likely you are to be right.

What the market lacks – what most investors lack – is Risk Intelligence.

There’s a good test to measure your “Risk Intelligence” here:

http://www.projectionpoint.com/

Incidentally, this cockiness caveat is the reason women tend to do better than men in the market.  All that testosterone gives you just enough confidence to hang yourself.

Happy Father’s Day, all you horrid investors!

I have more to write, but it will have to wait.  For the next few weeks I’ll be editing my book into a kindle format, in addition to the existing hardback and Accordance module formats:

http://www.cornerstonepublications.org/prod01.htm

We’re currently updating the text to the newest (28^th) edition of the Nestle Aland, just released.  For those who have the hardback copy, we’ll provide a short PDF insert of the minor changes to the text (about two pages).  The kindle and Accordance packages will be fully updated to the handful of changes in the Catholic Epistles.

Until then – don’t get too cocky out there.  Your own certainty is your worst liability.

Relax.  Sit back.  Read a book.  Read mine!  That should keep you occupied for a spell J

Tim

 

 

06/14/2013 intraday Sector change

The sector model is whipsawing again -- back into XLB now.

06/12/2013 Sector model change

Sector model sold XLB and bought XLU before the close.

06/06/2013 (premarket) -- All Good Things...

Sector Model	XLB	1.36%
Large Portfolio	Date	Return	Days
BBRY	7/16/2012	88.00%	325
CAJ	9/25/2012	-3.78%	254
BOKF	2/4/2013	14.68%	122
SWM	2/12/2013	37.11%	114
MWW	4/11/2013	21.65%	56
ABX	4/11/2013	-13.22%	56
TPX	4/22/2013	-9.61%	45
TTM	5/6/2013	0.94%	31
DLB	5/13/2013	0.26%	24
GMCR	5/24/2013	-0.25%	13
S&P	Annualized	9.28%
Sector Model	Annualized	23.79%
Large Portfolio	Annualized	31.38%

 

Rotation: selling BBRY; buying MATW in the funeral services industry.

As always, the exchange will not occur if there is an unfavorable gap (i.e. the buy gapping up relative to the sell, or the sell gapping down relative to the buy).

Keep in mind also that BBRY is only 40 days away from being a long term capital gain.  If I were holding it in an account with an open tax liability I would continue with it for perhaps another year.

I don’t think there’s anything wrong with BBRY.  In fact, I’m in their target market and will be buying their new keyboard phone when it comes for sale next week.  Why not?  They paid for it already.

Funeral Services is NOT something I want to invest in – but I also know that my instincts are the worst on the planet, so I’ll grit my teeth and follow the model…

Tim

 

06/02/2013 Bubble Farm

Sector Model	XLB	3.28%
Large Portfolio	Date	Return	Days
BBRY	7/16/2012	92.55%	321
CAJ	9/25/2012	-0.35%	250
BOKF	2/4/2013	16.81%	118
SWM	2/12/2013	34.51%	110
MWW	4/11/2013	23.44%	52
ABX	4/11/2013	-12.73%	52
TPX	4/22/2013	-8.11%	41
TTM	5/6/2013	3.00%	27
DLB	5/13/2013	2.01%	20
GMCR	5/24/2013	0.27%	9
S&P	Annualized	10.07%
Sector Model	Annualized	25.10%
Large Portfolio	Annualized	32.64%

 

It’s been a month now since there was a legitimate rotation on the model.  I cheated for a couple of weeks, rotating where I could, but the industries are remaining in lock-step with each other.

Most folks think of the market as either a bull or a bear.  Some would add “sideways” as a type of market.  But there is another kind: bubble.

Bubbles are weird.  They don’t have to make any sense, and if they made sense they wouldn’t be a bubble.

In a bubble either a sector or industry will just keep going in one direction.

But there is no sector or industry to this bubble.

This bubble is the entire market.

Has it popped?

It’s a bubble: you can’t tell when it’s popped until it’s too late.

In any case, there isn’t any meaningful rotation going on yet.  No doubt in a sudden reversal I’ll get another case of 52 card pickup like I did back in September:

http://market-mousetrap.blogspot.com/2012/09/09242012-major-rebalancing-in-morning.html

That was right at a top, by the way.

And no, you can’t use that for market timing.  It’s one thing to say, “at tops I usually get some heavy rotation”, but quite a different thing to say, “at heavy rotation I usually see a top.”  The first statement can be true and the second completely false.

My sector model is still mildly bullish, but weakening.

I’ve seen some sophisticated analysis out there arguing for an imminent collapse.  My models aren’t sensitive enough for that kind of thing.  The worst part for me is that my stocks move BEFORE the market, so even if I could anticipate market moves before the market actually moved, it would STILL be too late for me.

So, it doesn’t really do me much good to even try.

When it hits, it will hit.

Until then, bubbles.

My three year old has a little bath toy that sings a song about a “bubble farm.”

Of course he doesn’t get the words exactly right and he sings about the “bubble fart.”

Maybe he’s on to something…

Tim

 

05/26/2013 The Crystal Ball is Always Green

Sector Model	XLB	3.97%
Large Portfolio	Date	Return	Days
BBRY	7/16/2012	99.72%	313
CAJ	9/25/2012	5.26%	242
BOKF	2/4/2013	16.60%	110
SWM	2/12/2013	30.76%	102
MWW	4/11/2013	16.52%	44
ABX	4/11/2013	-21.67%	44
TPX	4/22/2013	-6.37%	33
TTM	5/6/2013	-3.87%	19
DLB	5/13/2013	0.64%	12
GMCR	5/24/2013	-1.41%	1
S&P	Annualized	10.82%
Sector Model	Annualized	25.83%
Large Portfolio	Annualized	32.05%
	YTD
S&P	15.67%
Sector Model	24.23%
Large Portfolio	18.43%

 

No rotation.

As you can see, the year to date performance of the sector model is again outstripping the full portfolio.  Meanwhile the Mousetrap continues to evolve, and the fundamentals are increasingly moving toward larger companies.

That makes sense, in light of the outperformance of the sector model, since the sector ETFs are cap weighted indexes.

It also makes sense as a trend continues to mature and as retail investors pile into stocks.

Of further note is the fact that the fundamental filters are beginning to make more sense from a classical value perspective.  These are right at the top of the selections:

Cash Flow Growth 5-Year	High
Sales Growth 5-Year	High
EPS Growth 5-Year	High
Est EPS 1st Qtr Out	High
Est EPS 2nd Qtr Out	High
Total Return 1-Year	Low

 

That translates to three things:

1) Earnings have usually been good in the past, and are

2) estimated to be good in the future, but

3) the price is depressed right now.

That’s simpler than what the model was spitting out before.

Heck, even Buffet could do that.

As for the market, I can’t say what it’s GOING to do.  I can only comment on what it seems to THINK it’s going to do.  It THINKS it’s going to go back to its long term median regression.  That would take the current trend above 2000 in mid-2015.

Keep in mind that the market thought it would ride the long term regression back in 2007 too.

A regression is great for estimating what the market will do a few business cycles out, but can’t tell you anything about the next few months.  It’s like that Shiller Yield I graphed a few weeks ago: fantastic for estimating ten year returns, and worthless in any shorter time frame.

The ONLY meaningful use of the Shiller Yield is to compare regional indexes for long term opportunities.

But don’t use long term estimates to predict the short term. 

And for goodness sake, don’t use the news!

99% of the market news articles have no idea what they are saying in terms of tradable calls.  I know this because they usually tell me what I’m thinking myself, and my brain can’t time its way out of a paper bag.

News articles have only one true goal – to sell news articles.

It’s like politicians – their only goal is to get re-elected.

Or judges – their only goal is to keep from being overturned.

So, news articles will write what you want to read; politicians will do what their donators demand; and judges will adjust justice in favor of whoever has more money to pay for appeals.

They don’t even pretend to be interested in truth, justice, or the American way.

What they ARE interested in, is money: news sales, political contributions, the richest litigant.

If you want to predict the future, you only need to do one thing: follow the money.

Investing works the same way: stocks make money when businesses make money. 

End of story.

Tim