| Model Portfolios: | April | Y-T-D | 12 Mos. | 4 Years | 8 Years |
| Performance Xtender | 2.1 % | 1.6 % | 3.1 % | 74.1 % | 348.1 % |
| Max Xtender | 4.3 % | 1.7 % | 12.8 % | 118.9 % |
860.3 % |
| Compared to Traditional Strategy: | |||||
|---|---|---|---|---|---|
| Buy and Hold (S&P 500 Index Fund) | 4.3 % | 4.5 % | 13.1 % | 64.9 % | 11.0 % |
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 recent new highs in the markets.
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
There was an extraordinary burst of strength last month in Large Cap stocks as reflected in the Dow Jones Industrial Average and the broader S&P 500 Index. Large Cap stocks had been lagging Mid Cap stocks in particular; but the favor of the market seems now to be rotating back to Large Caps.
Our models have been concentrated in Mid Caps based upon our relative strength measures which track the different sectors over an intermediate-term. This concentration served us well for several months but not in April. Mid Cap stock indices were up last month only about 2.8% compared with the 4.3% rise in the Large Cap S&P 500 Index.
Our relative strength measures are close to switching gears and may trigger the portfolios to move into Large Caps within the next week or two. The models' performance in April was also hampered by their somewhat defensive allocation postures. If the market can continue to strengthen at these high levels, the models will move to fully bullish postures.
Four Year Performance Graph (As of April 30, 2007)
Market Commentary
Market at New Highs
Executive Summary: Our models reduced stock market allocations somewhat after the severe breakdown in late February and have remained slightly defensive as the market recovered and re-tested the previous highs. While our statistics measuring the underlying supply/demand balance in the market are relatively healthy, the overall market is now showing a negative momentum divergence from a level of extreme over-extension. As a result, we are postured to reflect the possibility of a new, more extensive correction developing.
Last month we said we expected the market to "retest the highs" but that the severe market breakdown in late February probably signaled the beginning of a topping process that would lead to a longer-term corrective process.
The market has been pushing up against the extreme edge of a 4 standard deviation envelope (the two light blue lines on the chart) which tells us that by historical standards the market is extremely over-extended. The typical result has been either a serious correction or the initiation of a bear market cycle. A perfect example of this is what happened the last time the market was this extended. It was January of 2004 and the market rolled over into a 9 month correction.
We can't be certain however that a correction will be triggered. When the market has reached this extreme point and continued to advance above the 4-standard deviation envelope on strong momentum, it has signaled the beginning of long bull market advances. We saw several examples of this during past decades.
But at the moment, momentum is still lagging as the index makes new highs. You can see on the chart that the momentum oscillator (in red) has not made new highs, creating what technicians call a 'negative divergence'.
This explains why our model portfolios have remained postured somewhat defensively in the face of a strong advance in the market. The negative divergence occuring at a level of extreme over-extension suggests a high likelihood for the market to breakdown.
The Models Stick With the Trend: It is interesting to note that while our market commentary has 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 is 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 April 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 |
| Energy Sector Fund | 20% | RYEIX | 14% | ENPIX | 20% | XLE |
| Corporate Bonds, or Money Market |
20% Money Market Fund . ProFunds investors should have 26% in money market. | |||||
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 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. | |||||
