| Model Portfolios: | March | Y-T-D | 12 Mos. | 4 Years | 8 Years |
| Performance Xtender | -0.5 % | -0.5 % | 3.0 % | 76.9 % | 341.6 % |
| Max Xtender | -0.1 % | -2.5 % | 8.1 % | 136.5 % |
803.2 % |
| Compared to Traditional Strategy: | |||||
|---|---|---|---|---|---|
| Buy and Hold (S&P 500 Index Fund) | 1.0 % | 0.2 % | 9.7 % | 71.4 % | 24.1 % |
Dear Subscriber,
This issue of the newsletter includes the following:
Monthly Tracking Report: Get an update on the current performance of our Model Portfolios compared with a traditional "buy and hold" strategy as measured by the S&P 500 Index.
Performance Analysis: Read a detailed explanation of Model Portfolio performance covering the different times frames presented in the Monthly Tracking Report.
Market Commentary: This month we focus on the market's progress in what appears to be a major correction.
Model Portfolio Allocations: Check the most current portfolio allocations for our Model Portfolios. (Note that allocation changes are announced by email in a separate Trade Alert.)
Performance Analysis
Market Gains 1 Percent
The stock market dropped a total of 6.7% from its highs in late February before bottoming last month and igniting a rally that recovered 4.2% in value. In spite of the wild gyrations, the S&P 500 index managed a monthly gain of an even 1 percent.
Our models didn't perform as well since they reduced stock market allocations after much of the market's fall had taken place. The models remained defensively positioned through the end of the month.
Four Year Performance Graph (As of Mar. 30, 2007)
Results in the Performance Xtender model : This model is our most sophisticated strategy for growth investors who have a moderate risk tolerance, having experienced a maximum peak-to-valley temporary reduction in value ("maximum drawdown") of only -8.5% in the past 8 years. [Editor's Note: compare this to a -45.1% maximum loss experienced by a "buy and hold" investor in an S&P 500 index fund].
This model lost 0.5% in value during March versus a 1 percent gain in the S&P 500 index. Over the longer term, the model has excelled in providing the strongest ratio of return relative to risk. However, the model has significantly under-performed our expections for almost a year now. Looking at the past 4 years which encompassed most of the recent bull market, the model accumulated a total return of 76.9% compared with a 71.4% gain for the market. But its even longer term record suggests this model should have beat the market by much more. Looking at a longer, 8-year period ... that incorporated a severe bear market ... the model gained a total return of 341.6% compared with a Buy and Hold investor who would have earned a total return of only 24.1% holding an index fund tracking the S&P 500. The reason the difference was so substantial was the model's ability to avoid losses ... and even make money ... during the bear market periods while beating the market during the bull markets.
Bottomline, we are not satisfied with the model's recent bull market performance characteristics and a major upgrade of its logic is in the works.
- Performance Xtender 8-year Compound Annualized Return: 20.4% per year
Results in the Max Xtender model : This is our riskiest strategy because it uses leverage to magnify returns during both strong bull markets and bear markets. Yet while earning huge, market-beating returns, it has experienced a maximum peak-to-valley temporary reduction in value ("maximum drawdown") of only -31.5% in the past 8 years. [Editor's Note: compare this to a -45.1% maximum loss experienced by a "buy and hold" investor in an S&P 500 index fund earning mediocre returns].
The model lost a 0.1% in March versus a 1 percent gain in the S&P 500 index. Over the previous 12-month period, the model slightly under-performed the market 8.1% vs. 9.7%. Over the past four-year bull market period, the model produced a cumulative total return of 136.5% versus 71.4% for the market. Looking at the past 8 years, this model generated a cumulative total return of 803.2% compared with the market which did little better than break-even at a total return of only 24.1%. The reason the difference is so substantial is because of the model's ability to avoid losses ... and even make money ... during the bear market periods while substantially out-performing the market during bull market periods.
- Max Xtender 8-year Compound Annualized Return: 31.7% per year
Market Commentary
Market Struggles to Regain Bull Trend
Executive Summary: Our models reduced stock market allocations after February's severe drop in order to moderate additional portfolio risk. But so far, the models have not quantitatively determined that the internal technical condition of the market has deteriorated to a point that warrants even more defensive action. That will be determined by market behavior over the next several weeks and perhaps months. While we expect a period of serious correction to follow in the markets, we don't think it is likely that this downturn will evolve into a new bear market cycle until another rally attempt has been made to recover the old highs.
The question now is whether the powerful breakdown in the market late in February was just a blip ... an abberation ... or whether it was the opening volley of a powerful change in market trend affecting either the intermediate or longer term horizon.
From a technical perspective, we are now focused on the key technical level of 1432 on the S&P 500 Index. In the near term, the market's ability to gain and hold above this level will give us our most immediate insight. The 1432 level stopped the market's progress twice back in December. Then the level was successfully breached in Janaury as the market moved to new highs ... but not for long.
The powerful breakdown in February took the S&P 500 down almost 100 points. The market then rallied strongly back to the key 1432 level after bottoming near technical support at the 200-day moving average (blue line). And once again, 1432 acted as a line of "resistance" as the market held this level for only three days before dropping back in what appears to be a minor correction.
- If the bulls can regain 1432 on a re-test of the recent highs and hold the level successfully, it should set the market up for another run at the February highs set by the S&P 500 at around 1460.
But if a re-test of the 1432 level fails to hold, a return can be expected to the corrective lows near 1360 at the 200-day moving average support level. Below that, the next level of important technical support comes in at around 1300 on the S&P at the Long Term Uptrend Line (in green) which has supported the bull market since mid-2004.
While the battle next week, or the week after that, to regain 1432 should help resolve whether the market's immediate direction is up or down, the question remains whether the February breakdown was just a blip or whether it may signal a longer-term change in trend.
The Bull Market Was 'Overextended' on a Long Term Momentum Basis: We argued in our Janaury commentary that the market was overextended again on the basis of several long term momentum indicators. We pointed out that the last time the market reached such an extreme level, it triggered a 9-month correction.
- Now, the forecasted breakdown has been underway for a month. And we are inclined to believe that a corrective process of a longer-term duration has begun.
But note that such a longer-term correction could still include the possibility of seeing the S&P 500 briefly re-test the February highs before turning south again for a period of months.
The End of the Bull? Going back to our original projection last summer that the market needed "one more upleg" before its overall pattern would suggest an end of the 4-year+ bull market ... we have had that additional upleg and the sharp reversal in February suggests that it may be over, or very nearly over. We expect the market will make one more major attempt to recover the old highs and move ahead, but that may well be it.
Given the old age of the bull market and apparent change in investor psychology, there could be significant selling into the next rally. It will be important during the next bullish phase (if there is one) to pay close attention to the technical statistics and evaluate the underlying demand/supply for stocks as a gauge of whether investor psychology has taken a more permanent change for the worse, or not.
The Models Stick With the Trend: It is interesting to note that while our market commentary had a decidedly bearish tone over the previous year, our Model Portfolios remained largely bullish throughout ... and we captured the market's appreciation as a result. It illustrates one of the core benefits of following our Model Portfolios -- their ability to follow and stick with the primary underlying trend of the market, uneffected by anyone's bias.
While our models are quantitatively tracking and analyzing a battery of market risk factors, their allocation logic is designed to stick with the trend. Only in extreme instances of perceived high statistical risk do our models trigger a move against the underlying trend.
From your own perspective as an investor, following models such as these can help you reconcile the constantly conflicting views of different market gurus, economists and advisors. The models provide an objective and disciplined method of investing in the face of ongoing uncertainty. The parameters and action triggers built into our models' mechanical logic are based upon statistically-relevant patterns that have proven a high degree of reliability over decades of market history. In a nutshell, the models provide the investor with an "edge" with which to face off against market uncertainty. The timing of the models is not always perfect. However, the mechanical logic recovers quickly from mistakes, cutting losses short ... and letting profits run.
Recommended Model Portfolio Allocations
Model Portfolio: 'Performance Xtender'
(A model portfolio that invests selectively in stock market index funds, plus certain market sectors such as Energy, Gold and Real Estate, and in an Inverse Fund ("Bear Fund"), depending on current market trends for each type of investment. The allocation mix is designed to beat the market significantly during both bull and bear markets with only a limited risk of volatility.)
... Portfolio as of Mar. 30, 2007 ...
| Current Recommended Portfolio Allocations | Rydex Funds | ProFunds | ETFs | |||
|---|---|---|---|---|---|---|
| Allocation | Ticker | Allocation | Ticker | Allocation | Ticker | |
| Mid Cap Stock Fund | 60% | RYAVX | 60% | MDPIX | 60% | MDY |
| Corporate Bonds, or Money Market |
40% Money Market Fund . | |||||
Model Portfolio: 'Max Xtender'
(A model portfolio that invests selectively in stock market index funds and in an Inverse Fund ("Bear Fund"), depending on current market trends for each type of investment. During strong market trends ... either bullish or bearish ... the model uses up to 2-to-1 leverage to magnify returns. The allocation mix is designed to beat the market substantially during both bull and bear markets but with a relatively high risk of volatility.)
... Portfolio as of Mar. 30, 2007 ...
| Current Recommended Portfolio Allocations | Rydex Funds | ProFunds | ETFs | |||
|---|---|---|---|---|---|---|
| Allocation | Ticker | Allocation | Ticker | Allocation | Ticker | |
| Lev'd Mid Cap Fund | 50% | RYTNX | 50% | UMPIX | 150% | MDY |
| UnLev'd Mid Cap Fund | 50% | RYAVX | 50% | MDPIX | - | - |
| Corporate Bonds, or Money Market |
ETF Investors: Note that the MDY position is margined 1.5 to 1. | |||||
