| Model Portfolios: | March | Y-T-D | 12 Mos. | 6 Years | 9 Years |
| Performance Xtender | -3.5 % | -5.9 % | -0.9% | 104.6 % | 337.7 % |
| Max Xtender | -0.3 % | -10.36 % | -11.1 % | 178.5 % |
703.1 % |
| Compared to Traditional Strategy: | |||||
|---|---|---|---|---|---|
| Balanced Portfolio (60% stocks 40% bonds) | -0.6 % | -5.6 % | -5.6 % | 27.8 % | 32.9 % |
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 traditionally balanced buy and hold portfolio consisting of 60% stock funds and 40% bond funds.
Performance Analysis: See a comparison of the Model Portfolios' performance in Bull Market and Bear Market cycles.
Market Commentary: This month we provide an updated technical analysis of the current market situation.
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
People like to say that "a picture is worth a thousand words." Here we offer two pictures to demonstrate the performance of our model portfolios in two distinctly different market environments:
- Bull Market performance since October of 2002
- Bear Market performance from March 2000 to October 2002
Both model portfolios are compared to a traditional "balanced" portfolio allocation of 60% stock funds and 40% bond funds.
Bull Market
Performance Over the Bull Market Cycle:
Both model portfolios have performed as expected over the period. The Performance Xtender has generated a significant increase in gains compared to a Traditional Balanced Portfolio. And the Max Xtender used leverage to generate even stronger performance, although at the expense of significant volatility.
Bear Market
Performance During the Most Recent Bear Market Cycle:
Both model portfolios delivered a substantial increase in value during the Bear Market of 2000 through 2002. By contrast, a "buy and hold" investor ... holding an index fund representing the S&P 500 index ... would have lost about 45% during the 2 1/2 year bear market. An investor with a "traditional balanced portfolio" would have avoided huge losses during the period but still would have suffered a negative return.
The more significant benefit of following these model portfolios can be seen in the longer term ... over periods that are long enough to include two or more market cycles. A 9-year look back period is long enough to include both of the two most recent market cycles. Over this period of time, the cumulative return of the Performance Xtender (based upon a combination of live returns and "backtested" returns from computer simulation) was 337% ... about 10 times the "traditional portfolio" which returned a cumulative gain of only 33% in 9 years. The Max Xtender, which uses leverage aggressively to accentuate gains in both up and down markets, gained about 21 times as much as the traditional portfolio with a cumulative 9-year return of 703%.
- The simple reason behind the models' huge gains over a traditional portfolio is their ability to dynamically shift investment allocations to avoid huge losses and even make gains during bear market cycles. While a traditional portfolio will lose significant value during a bear market, the model portfolios can make money and are able to compound profits from the bear market period on top of profits earned during a bull market. The cumulative benefit of such compounding becomes huge over time after one or more bear market cycles.
While our model portfolios can be more volatile than a traditional portfolio in the short-run, they are much less volatile in the long run because they can avoid the very deep losses suffered by traditional buy-and-hold strategies from which an investor can take years to recover.
Market Commentary
Stuck in a Trading Range
Executive Summary: Our quantitatively-based portfolio models are now postured according to a "Bearish" reading of stock market risk. While we expect the market may still make attempts to rally in the short to intermediate term, our technical indicators have now all turned bearish for the longer term. Moreover, our technical and fundamental analyses strongly suggest that the US stock market has reached the peak of a multi-decade expansion and is now only in the early phase of a long term reversal of direction. Our expectation is that the next five to ten years will prove to be a very challenging environment for buy and hold investors in US stocks.
[Every month we provide a commentary on the market which is based upon a basic charting and technical analysis approach. You will not find us often discussing the types of "fundamental" factors that most market analysts use to make their case. Hopefully, you will find our commentary refreshing and a welcome change of pace from mainstream analysts.]
We said in the February commentary -- right after the market made its first major bottom on January 23 -- that "the next significant feature of market action may be a 'trading range'. Specifically, we are talking about the zone from about 1270 on the S&P 500 as the 'low point' up to about 1370 as the 'high point'. The market may trade back and forth between these two levels of technical 'resistance' and 'support' as investor psychology takes more time to work itself out."
We've also made the case in previous commentary that a long-term technical analysis of the market says a Bear Market has begun.
Now that the market has had its 20% correction from the top (which by mainstream definition puts this drop into 'bear market' territory) what does an up-to-date technical analysis tell us about the future?
Our prediction in February of a large trading range has played out exactly as suggested. And indeed, investor psychology has taken "more time to work itself out."
Trading ranges are technically a form of "consolidation" in market behavior that mark indecision. Technicians use such consolidation patterns to predict future market direction based upon the direction of the eventual "breakout" from the pattern.
In this case the trading range has played out in a declining, horizontal consolidation pattern (as marked out by the two red lines). So we will be watching to see whether the market will break out of the pattern to the upside or the downside.
A Bullish Double Bottom Formation
Another prominent feature of the current technical picture is the Double Bottom formation that was completed after the market dropped briefly below the previous January low at 1270 on the S&P 500 index and bounced strongly on March 18. At the very least this bullish signal predicted a rise in the market to the top end of the trading range. And that is exactly what happened as the S&P 500 traded quickly back to attack the 1370 level at the top of the consolidation pattern.
But now what? The market may stage a "probe" above the top end of the trading range (as defined by the downward sloping red line) in an attempted break out. But then the market's progress will face very stiff "overhead resistance" very quickly at 1405 on the S&P 500 (the blue line on the chart).
The 1405 level is technically very significant because it had previously stopped the falling market in August of 2007 and again in November. This was the level from which two previously very strong rallies had launched. In technical terms, we call this a "support" level.
But then the market fell again to the 1405 level in January and finally "broke support" on January 15. From there the market proceeded to drop all the way to 1270 before establishing a bottom and a new support level on January 23.
The previous support level at 1405, once broken, became "overhead resistance" in technical terms. In other words, traders now view this level as an important "pivot" in the price action. They will expect to see the market successfully clear this level before believing that the downward trend of the market has finally been broken.
It would not be surprising to see the market attempt a break out from the declining horizontal consolidation pattern and attack the 1405 level. But then the key will be whether the market can decisively clear the 1405 overhead resistance level, or not.
If the Bear Market does have more to run, then any such attack on the 1405 level should "fail" and trigger at least another drop to the bottom end of the trading range.
The Trading Range Consolidation as a 'Continuation Pattern'
If the Bear Market continues and breaks out of the trading range to the downside, it would mean that the current horizontal consolidation pattern will eventually be classified as a Continuation Pattern. Trending markets (in either up or down directions) are typically marked by numerous, temporary pauses to the underlying, longer-term trend. These pauses are either temporary corrections or periods of consolidation. Such periods of consolidation are more often than not "continuation patterns" in that they represent only a pause in the underlying trend.
But not always. Sometimes consolidation patterns play out as a "reversal pattern" and result in a change in the fundamental direction of the market. And the Double Bottom signal triggered in the market on March 18 gives added credence to this possibility in the current time frame.
So for the time being we must give respect to a possible bullish resolution of this trading range consolidation pattern and look for the market to stage an attack, at the very least, on overhead resistance at the 1405 level.
But if the market rolls over and drops enough to break through the 1270 level where the Double Bottom was established, then in all probability this trading range consolidation will resolve bearishly to the downside, projecting another leg down in the Bear Market to lower levels below the trading range.
Whence From There?
If this consolidation pattern does resolve to the downside, there is another support level nearby at 1220 on the S&P 500, only a 4% drop below 1270. The next important support level comes in at about 1065 which is about 16% below 1270. A drop to 1065 would represent an overall drop of 32% from the all time high in the S&P 500 of 1575 established in October.
But investors must recognize that the bottom set by the market in 2002 that ended the Bear Market of 2000 - 2002 will exert a powerful psychological pull on stocks. In terms of typical market behavior patterns, it would not be at all unusual for the current Bear Market to completely retrace its gains from the 2003 - 2007 Bull Market period and return to previous bottom.
A complete retracement of the S&P 500 index to the previous lows set in 2002 at a level of 775 would represent a 50% decline from the peak.
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 March 31, 2008 ...
| Current Recommended Portfolio Allocations | Rydex Funds | ProFunds | ETFs | |||
|---|---|---|---|---|---|---|
| Allocation | Ticker | Allocation | Ticker | Allocation | Ticker | |
| Precious Metals Fund | 10% | RYPMX | 10% | PMPIX | 10% | GDX |
| Inverse Bear Fund | 40% | RYURX | 40% | BRPIX | 40% | SH |
| Corporate Bonds, or Money Market |
50% Money Market Fund . Note that the gold bullion fund "GLD" is an alternative fund for precious metals that should be less volatile than a mining shares fund such as GDX. | |||||
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 March 31, 2008 ...
| Current Recommended Portfolio Allocations | Rydex Funds | ProFunds | ETFs | |||
|---|---|---|---|---|---|---|
| Allocation | Ticker | Allocation | Ticker | Allocation | Ticker | |
| Inverse Bear Fund | 100% | RYURX | 100% | BRPIX | 100% | SH |
| Corporate Bonds, or Money Market |
. | |||||
