| Model Portfolios: | December | Y-T-D | 12 Mos. | 3 Years | 7 Years |
| Performance Xtender | 0.0 % | 5.2 % | 5.2 % | 65.5 % | 352.8 % |
| Max Xtender | -1.4 % | -7.8 % | -7.8 % | 101.1 % | 889.0 % |
| Compared to Traditional Strategy: | |||||
|---|---|---|---|---|---|
| Buy and Hold (S&P 500) | -0.6 % | 2.7 % | 2.7 % | 46.6 % | 10.7 % |
Performance Analysis
Profit-taking in December
The market took a breather during the past month and traded sideways. The S&P 500 Index lost a net 0.6% for the month. The two Model Portfolios also traded sideways and showed almost no net change by the end of December.
An Unexciting Year: We have talked all year about the market's lack of trend and see-saw action. Professionals on Wall Street hoped a strong fourth quarter would make the year a clear winner for the record-books. It appeared they would get their wish at the end of November. But December didn't cooperate, and the S&P 500 average limped into the end of December posting only a 2.7% gain for the year ... hardly better than the yield on a money market account.
Three Year Performance Graph (As of December 30, 2005)
Our two Model Portfolios ended the year with a mixed performance. Sideways markets, such as we have seen in 2005, are a challenging environment for our trend-following computer models; and our Model Portfolios tend to under-perform a Buy and Hold strategy during such times ... unless there are strong trends in certain sectors that the models can capture. During 2005, we did have strong trends at times in Real Estate, Gold and Energy stocks; and the Performance Extender model was able to capture the benefit and out-perform the market as a result.
- Because the market's trend has been essentially sideways for two years now ... and performance has been lackluster as a result ... we thought this would be a good time to focus attention on the models' performance over two discrete periods: (1) the most recent Bull Market cycle; and (2) the most recent Bear Market cycle. Our purpose is to keep you focused on the fact that long term returns ... over multiple market cycles ... are your most important concern.
Bull Market Performance Comparison: The 3-year chart above compares the models' performance with Buy and Hold over the recent Bull Market cycle. You can see that the leveraged Max Xtender model gained more than 2-times the market which is exactly what we expect for a bull cycle given that the Max Xtender can be leveraged up to 2-times.
The Performance Xtender model gained 140% of the market's appreciation over this same period. It did what its name suggests -- it extends performance. You can also see from the chart that it extends performance with very little volatility (in other words, the blue line is fairly smooth).
Bear Market Performance Comparison: Now let's look at the Bear Market that developed following the historic bull run of the 1990's. The market peaked during the end of March, 2000 and dropped for 2 1/2 years. Finally, it bottomed in late September, 2002 and the Bear Market was over. The Max Xtender model initially lost money during 2000 since much of the market's action that year was sideways, see-saw movement. But then the down-trend got going in earnest during 2001 and the Max Xtender made gains from its postion "short" the market. By the end of the Bear Market, the Max Xtender had gained over 80% while a Buy and Hold strategy would have lost about 40%.
The Performance Xtender also goes short during Bear Markets (by investing in Inverse Funds) but does not use leverage. As a result, it was able to gain almost 70% during the Bear Market; but it did so with much less volatility than the Max Xtender model. A part of the Performance Xtender's success during this period was due to its ability to tap into gains in three "defensive" sectors: Energy, Gold and Real Estate.
Performance over Multiple Cycles: In the past seven years, a Buy and Hold strategy investing in the S&P 500 Index would today show a cumulative total return of only 10.7%! You would have done better in a bank account and also avoided the heartache of a 40% decline in the value of your portfolio combined with waiting for nearly seven years to break even.
- We endeavor to communicate to our readers the long-term benefit of avoiding losses during Bear Markets (and even better ... making some money). Mathematically, your portfolio will compound growth much faster if you avoid those 40% Bear Market losses.
Rather than gaining only 10.7% over 7 years, the Performance Xtender gained 352.8%. It accomplished this not only because of its Bull Market performance but also by compounding that with its gains during the Bear Market.
The Max Xtender gained a remarkable 889% during the same 7-year period while a Buy and Hold Investor did little better than break even. You can see from analyzing the above two charts that the Max Xtender realized this dramatic increase in total return not only because of its Bull Market performance but also because of its strong gains during the Bear Market.
Market Commentary
Bullish Breakout Holds
In last month's issue, we focused on the significance of the market's break-out in November. The S&P 500 Index had finally broken decisively above the 1220 level which had kept the market hemmed in for most of the year.
- However, the market needed to validate the break-out by showing that it could weather a correction and continue to "hold" above the important 1220 level -- the point defining the break-out.
During the month of December, the market engaged in essentially a sideways correction, dropping no lower than 1245. Then, it shot up during the first week of January, closing nicely above its previous high. All we need now is for the market to hold these recent, new highs and extend upon its gains. This kind of positive market action should certify that we have seen a significant market break-out that should evolve into a new leg of the Bull Market.
A Maturing Bull Market: But as we have pointed out in recent months, the current Bull Market trend is statistically past its prime. And while it is getting old in terms of age, it has also been showing deteriorating signs of internal health as our longer-term indicators register weakness in the market's supply/demand condition.
Differing Sector Performance: At this apparently late stage of the Bull Market, it is also interesting to look at the performance of different market sectors, in terms of where they have come since the end of the "Roaring 90's Bull Market" that ended in 2000.
A Chart of Sector Performance Since the 2000 Market Peak
- Large Cap stocks on average are still 15% short of breaking even with their highs set in 2000. If Large Cap stocks cannot recover their old highs before rolling over into a new Bear Market, the Bull Market cycle of the past 3 years would then appear to be only an "interlude" during an extended Bear Market super-cycle which began in 2000.
- Small Cap stocks didn't suffer as much during the Bear Market cycle; and their comparatively strong recovery since early 2003 propelled them to new, historical highs leading to a net 69% gain since the beginning of the Bear Market. In point of fact, Small Cap stocks' recent Bull Market cycle has been an extension of the 1990's Bull Market super-cycle.
- The Nasdaq Composite Index, consisting mainly of technology stocks, remains 60% below its all-time Bull Market highs. Clearly, the 2000 peak in the Nasdaq represented the peak of a bubble; and tech stocks have had to endure a frightening degree of depreciation as a result. The Nasdaq clearly remains in the grasp of a Bear Market super-cycle in spite of its gains during the past 3 years.
Capturing Sector Performance Differentials: The substantial differences in performance between the LargeCap, SmallCap and technology sectors point out how important it is to keep your portfolio focused on the strongest sectors. Capturing these differences effectively can make substantial differences in your long-term success.
This is exactly what all of our models attempt to do. For example, during the Bull Market period leading up to the market peak in 2000, the Performance Xtender and Max Xtender models were focused on the tech sector and took advantage of their extreme gains. Then, they bailed out of tech stocks near the top. During the ensuing Bear Market period, all of our model portfolios, including the Growth Portfolio and Conservative Portfolio, took advantage of the differential strength in SmallCap stocks to enhance performance. And then, since the new Bull Market began in early 2003, the model portfolios have taken advantage of the stronger relative performance of SmallCap stocks during much of this period.
- Our "dynamic" approach to managing the allocation mix between different sectors is a significant contributor to long-term performance.
Recommended Model Portfolio Allocations
Model Portfolio: 'Performance Xtender'
| Current Recommended Portfolio Allocations | Rydex Funds | ProFunds | ETFs | |||
|---|---|---|---|---|---|---|
| Allocation | Ticker | Allocation | Ticker | Allocation | Ticker | |
| Gold Stocks Fund | 20% | RYPMX | 15% | PMPIX | 20% | GLD |
| MidCap Stock Fund | 40% | RYAVX | 40% | MDPIX | 40% | MDY |
| LargeCap Stock Fund | 20% | RYZAX | 20% | BLPIX | 20% | SPY |
| Energy Stock Fund | 20% | RYEIX | 15% | ENPIX | 20% | XLE |
| Corporate Bonds, or Money Market |
Money Market Fund: 10% if using ProFunds; Also for ETF investors, we recommend using a gold stock fund rather than the ETF 'GLD'. | |||||
Model Portfolio: 'Max Xtender'
| Current Recommended 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 Money Market |
ETF Investors: Note that the MDY position is 50% leveraged with margin for a 150% exposure to the stock market. | |||||
