Trade Alert - January 1, 2006

Model Portfolio Allocation Changes- This Week

Models Become More Cautious

The logic in our investment models is once again reading a heightened level of risk in the market environment. The change is enough to trigger our models to back away somewhat from their fully bullish posture. As a result, all of our Model Portfolios are initiating incremental steps within their portfolio allocations to reduce their exposure to potential market volatility.

The incremental change in posture was triggered by more than just the recent drop in the market. In addition, the models are reading increasing deterioration in the underlying supply/demand conditions in the U.S. stock market. For example, in spite of the market's sharp break-out into new high territory in November, volume has slackened ... failing to deliver the purchasing power needed to push prices higher. In addition, the "breadth" of bull market participation continues to become increasingly selective as fewer and fewer stocks and business sectors have moved ahead with the market averages.

Another factor our models track is investor sentiment. This is a so-called "contrary indicator" and last week sentiment statistics reached wildly optimistic levels that have been historically associated with tops in bull markets.

Potential For a Failed Break-out: In discussing the November breakout, we mentioned that the market must avoid a "failed breakout" in order to evolve into a legitimate, new leg of the existing bull market. We said:

" From a technical perspective, the strong influence of the 2005 trading range finally appears to have been broken ... that is, as long as any near-term market weakness doesn't cause the market to decisively fall back below the recent point of breakout. If this breakout holds, then it should usher in another leg of the bull market that began 3 years ago. "

So far, the market hasn't violated the most recent point of breakout at the 1244 level on the S&P 500 Index. But the 1244 level forms only the first line of defense ... the nearest technical level of "support" for the rally. However, from a longer-term perspective, we are focused on the critical 1220 level on the S&P 500 that we have been talking about all year. The market peaked at 1220 a year ago and then made two faltering attempts to break higher. Finally, the market broke decisively above the 1220 resistance level in November.

Technical Support for the Bull Market Trend: We therefore see the 1220 level as the more critical level of long-term support for this rally (because strong "resistance" levels, once exceeded, become strong "support") ... and indeed it seems critical for defining continuation of the 3-year old bull market. Furthermore, the 1220 level is reinforced technically by the convergence to two other important psychological sources of support -- the 200-day Moving Average of the market's price action and the "trend line" drawn on a chart of the market, linking the increasingly higher "bottoms" during this bull market. Each of these sources of support are coming in around the 1220 level; and together they should provide a high degree of support for the bullish trend.

• So, the 1220 level is what we are watching and the level which, if broken, would trigger the very bearish "failed breakout" signal.

But it is equally likely that the market will stop its recent weakness at a level above 1220 and recover. We are reasonably likely to see the market take at least one more stab at establishing new highs. As long as the balance of odds continue to favor the bull market, our Model Portfolios will maintain at least a moderately bullish allocation posture.

In the Performance Xtender -- This model portfolio has triggered a shift out of the 40% allocation in an Over-the-Counter (OTC) stock fund into a Mid Cap stock fund. The move does not reduce the portfolio's overall exposure to the stock market, however it does shift its mix into less volatile stocks.

In the Max Xtender -- This model is reducing exposure from a 2-times leveraged position down to 1.5-times. In addition, it is shifting exposure out of OTC stocks (which track the Nasdaq composite) and moving completely into Mid Cap stocks which have been the momentum leader.

New Model Portfolio Allocations

Model Portfolio Details

The tables below provide the percentage allocation details and mutual fund ticker symbols for investors following the Model Portfolios by using funds from either of the Rydex Investments or ProFunds mutual fund companies -- or alternatively, investors using exchange traded funds (ETFs).

'Performance Xtender'

Model Portfolio Changes for this week	Rydex Funds		ProFunds		ETFs
	Allocation	Ticker	Allocation	Ticker	Allocation	Ticker
SELL OTC Stock Fund	40%	RYOCX	40%	OTPIX	40%	QQQQ
BUY Mid Cap Fund	40%	RYAVX	40%	MDPIX	40%	MDY
Corporate Bonds, or Cash	-

New Model Portfolio Allocations	Rydex Funds		ProFunds		ETFs
	Allocation	Ticker	Allocation	Ticker	Allocation	Ticker
LargeCap Stock Fund	20%	RYZAX	20%	BLPIX	20%	SPY
Gold Stocks Fund	20%	RYPMX	15%	PMPIX	20%	GLD
Energy Stocks Fund	20%	RYEIX	15%	ENPIX	20%	XLE
MidCap Stock Fund	40%	RYAVX	40%	MDPIX	40%	MDY
Corporate Bonds, or Cash	Money Market Funds: ProFunds investors only should be holding a 10% allocation in Money Market.

'Max Xtender'

Model Portfolio Changes for this week	Rydex Funds		ProFunds		ETFs
	Allocation	Ticker	Allocation	Ticker	Allocation	Ticker
SELL Lev'd OTC Fund	50%	RYVYX	50%	UOPIX	100%	QQQQ
BUY Mid Cap Fund	50%	RYAVX	50%	MDPIX	50%	MDY
Corporate Bonds, or Cash	-

New Model Portfolio Allocations	Rydex Funds		ProFunds		ETFs
	Allocation	Ticker	Allocation	Ticker	Allocation	Ticker
Lev'd MidCap Fund	50%	RYTNX	50%	UMPIX	150%	MDY
UnLev'd MidCap Fund	50%	RYAVX	50%	MDPIX	-	-
Corporate Bonds, or Cash	ETF Investors: Note that the MDY position is margined 50% for a 1.5-times leveraged position. Rydex Investors: Note that Rydex does not have a leveraged MidCap fund, so we have substituted RYTNX.