| Model Portfolios: | April | Y-T-D | 12 Mos. | 3 Years | 7 Years |
| Performance Xtender | 2.0 % | 8.4 % | 20.4 % | 68.9 % | 334.7 % |
| Max Xtender | -0.1 % | 11.6 % | 22.4 % | 94.0 % | 751.1 % |
| Compared to Traditional Strategy: | |||||
|---|---|---|---|---|---|
| Buy and Hold (S&P 500) | 1.2 % | 5.0 % | 13.3 % | 48.9 % | 7.9 % |
Performance Analysis
Market Barely Sets Another High
The market traded down, and then up, and barely managed to keep the bull market trend alive during April with a 1.2% gain. But our models have been reading increasing signs of risk in the market and have taken several steps to become more defensive. With lower levels of exposure to the stock market, most of our models somewhat under-performed the market this month ... except for the Performance Xtender model which has benefited from its 20% allocation in precious metals stocks. But year-to-date, and for the past 12-months, our models have performed very well. And their longer-term 3-year and 7-year performance comparisons are stellar.
Three Year Performance Graph (As of April 28, 2006)
In the Performance Xtender model : This model is our most sophisticated strategy for growth investors who have a moderate risk tolerance. The model gained 2.0% during April compared with just 1.2% for a Buy and Hold investor holding an S&P 500 index fund. Over the past 12-month period, this model has returned 20.4% compared with 13.3% for a Buy and Hold investor. Looking at the past 3-year period, which has encompassed most of the recent bull market, the model has accumulated a total return of 68.9% compared with only a 48.9% gain for Buy and Hold. Looking at a longer, 7-year period that incorporated a severe bear market, the model gained a total return of 334.7% compared with a Buy and Hold investor who would have had a total return over the 7 years of only 7.9%. 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.
- Performance Xtender 7-year Compound Annualized Return: 23.3% per year
This model is currently defensively postured with only a 40% allocation to the stock market averages and a 20% allocation in cash. In addition, the model has a 40% allocation in two "defensive" sectors: Gold and Energy stocks.
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. It came in just below break-even for the month with a small 0.1% loss compared with the market's 1.2% increase. However, the model is up 11.6% for the year; and over the past 12-month period, the model has gained 22.4% compared to only a 13.3% gain by the S&P 500 Index. Over the past three years, the model produced a cumulative total return of 94.0% over this bull market period -- allmost 2-times what the market produced. Looking at the past 7-year period, this model has generated a cumulative total return of 751.1% compared with the market which has done little better than break-even with a total return of only 7.9%. 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.
- Max Xtender 7-year Compound Annualized Return: 35.8% per year
This model remains fairly aggressively postured, with a 150% allocation to the stock market averages (leveraged 1.5 to 1). This model is designed to "swing for the fences"; but because of the heightened market risk discussed earlier, the model has ratcheted back both total market exposure and its volatility setting to reduce the potential impact of any market decline.
Market Commentary
Bearish Breakout in Interest Rates
Last month we addressed the question of whether a new Bear Market might be just around the corner in the stock market. We also focused in on the fact that longer-term interest rates were on the verge of reversing the very significant downtrend in rates that has been in place since early 2000. At the time we said that if rates did break-out to the upside, and establish a new uptrend pattern, it might be the last straw that finally breaks the back of the Bull Market.
It turned out that interest rates did break-out to the upside as you can see in the chart below. In doing so, rates broke out of a narrow trading range that has been in place for almost 3 years and also provided technical confirmation that the previous downtrend in rates is now very likely over.
Oil, Gold and Interest Rates: Now the stock market has three very negative trends to deal with-- the rising price of crude oil, rising inflation expectations as seen in gold and other commodities, and now a new rising trend in interest rates.
- You might have wondered why the stock market has seemed to struggle so much even though the economy seems to be quite strong and corporate profits have continued rising at a "double-digit" pace.
A Chart of 10-Year Treasury Note Yields (As of April 28, 2006)
Market Pundits to the Rescue? For the most part, the pundits have remained bullish about stocks. They talk about the amazing resiliance of the economy, the relative lack of inflation and consumers' ability to absorb rising gasoline prices. They talk about the stock market averages continuing to make new highs.
What they don't talk about is that a majority of individual stocks have already begun new bearish downtends, even as the market averages struggle to new highs. They don't talk about waning volume ... which shows the declining interest of large investors to commit new money. By their collective actions, investors don't seem to be buying the pundits' happy talk.
Declining Momentum As Buying Interest Stalls
Signs of Fatigue: Our analysis of the underlying supply and demand for stocks has shown a developing case of buyers' fatigue for some time now ... actually since August of last year. This type of deterioration in the technical statistics underpinning the market's health has been evident during the waning phases of every bull market on record.
- With the increasing signs of fatigue last fall, we said that only one more rally to new highs was likely ... and we now seem to be nearing the end of that last rally in this Bull Market that began over 3 years ago.
You can see in the chart above that this latest rally began in October. But most of the rally occured in November with one big spurt. Since then, the market has struggled ahead with declining vigor. Each new rally attempt is stalled by a decline that breaks down through each previous high -- creating the tell-tale pattern of bullish fatigue defined by a series of overlapping highs and lows. The slowing rate of momentum is also evident in the declining pattern displayed by a "price oscillator" indicator (show on the chart in red) that measures the change in the market's rate of change.
Keep an Eye on Technical Support Levels: Expecting that the market may be nearing its final peak, we are closely watching the market's behavior vis-a-vis certain key technical support levels as shown on the chart above. If the market can continue to move above these levels, we can feel comfortable that the bullish trend is still nominally intact (although, as we've indicated earlier, the market averages can hold up while a majority of stocks move into bearish declines). On the other hand, if and when the market begins to break down through one or more of these levels, the current bullish uptrend will be increasingly in jeapardy. And given this Bull Market's old age, combined with its deteriorating statistical health, a break of these support levels will more than likely signal the onset of a new bear market trend.
Sell Now or Sell Later? If you buy into this analysis, then the natural question is whether you should sell out of your stock portfolio now or later. But please understand that by following any of our Model Portfolios, you no longer need to ask such a question. The models are designed to follow the market's action closely ... so you don't have to. As long as this Bull Market remains intact, the models will maintain a significant exposure to the stock market and participate in the continued price appreciation. But when the bullish trend ends, the models will reduce, and then fully exit, their stock market exposure in order to lock in the profits from the past three years. And the models will posture themselves to take advantage of the bear market and make some money. At the moment, our models have already begun the process of ratcheting down stock market exposure to dial back risk as the market's uptrend shows increasing signs of deterioration.
If the analysis offered above turns out to be wrong and the stock market evolves into another mega-bull experience similar to the 1990's, you will be no worse off by following one of our models. Again, the reason is simple: Our models follow the market's trends. They let the market do the talking. You needn't worry about anyone's fundamental analysis of the economy or the market, because the model will simply follow the market and make sure you participate in the upside and avoid most of the downside.
What could be simpler than that?
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 April 28, 2006 ...
| Current Recommended Portfolio Allocations | Rydex Funds | ProFunds | ETFs | |||
|---|---|---|---|---|---|---|
| Allocation | Ticker | Allocation | Ticker | Allocation | Ticker | |
| LargeCap Stock Fund | 40% | RYZAX | 40% | BLPIX | 40% | SPY |
| Gold Stock Fund | 20% | RYPMX | 15% | PMPIX | 20% | GLD |
| Energy Stock Fund | 20% | RYEIX | 15% | ENPIX | 20% | XLE |
| Corporate Bonds, or Money Market |
Money Market Fund: 20%. ProFunds investors should have 30% in Money Market funds. | |||||
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 April 28, 2006 ...
| Current Recommended Portfolio Allocations | Rydex Funds | ProFunds | ETFs | |||
|---|---|---|---|---|---|---|
| Allocation | Ticker | Allocation | Ticker | Allocation | Ticker | |
| Lev'd LargeCap Fund | 50% | RYTNX | 50% | ULPIX | 150% | SPY |
| Unlev'd LargeCap | 50% | RYZAX | 50% | BLPIX | - | - |
| Corporate Bonds, or Money Market |
ETF Investors: Note that the SPY position is margined 1.5-to-1. | |||||
