| Model Portfolios: | June | Y-T-D | 12 Mos. | 3 Years | 7 Years |
| Performance Xtender | -2.5 % | 1.6 % | 7.6 % | 44.9 % | 286.7 % |
| Max Xtender | -0.3 % | 5.8 % | 9.6 % | 55.5 % | 616.3 % |
| Compared to Traditional Strategy: | |||||
|---|---|---|---|---|---|
| Buy and Hold (S&P 500) | - % | 1.7 % | 6.3 % | 32.8 % | 6.2 % |
Performance Analysis
Market Rebounds to Breakeven for the Month
After dropping 3.1% during May, the market dropped an additional 4% during June before bottoming on June 14th. From there, the market rallied to close the month almost exactly where it had begun.
Both of the Model Portfolios under-performed the market in June. This is to be expected from these models during sharp corrections of a bullish trend. Both models will be more volatile over short-run periods than a broad market average such as the S&P 500 index. But the models will be less volatile over longer-run periods, avoiding the large percentage losses suffered by Buy and Hold investors during deep corrections and bear markets. In spite of the models' volatility over the past 2 months, they have still out-performed the market over the past 12-month period. And over longer periods such as 3 years and 7 years, the models have significantly out-performed.
Three Year Performance Graph (As of June 30, 2006)
In the Performance Xtender model : This model is our most sophisticated strategy for growth investors who have a moderate risk tolerance. The model lost 2.5% in June not so much because of the general drop in the market (since it was only 40% invested in Large cap stocks), but more so because of the unusually sharp drops in our two sector investments ... precious metals and energy stocks. Because of this model's periodic exposure to several sector funds, its performance can be somewhat more volatile than the broad market averages during short-term market swings. However, its track record has shown it to be much less volatile over longer time periods and the model has delivered the strongest risk-adjusted return of any of our Model Portfolios. The model's volatility in June caused a drawdown in the total value of the portfolio and triggered "stop loss" logic, forcing the sale of the two most volatile investments -- energy and precious metals. Unfortunately, the stop loss trigger forced us out of these investments near the bottom of their correction. Both sectors have since traded up; and the model would have shown less of a loss this month had it remained in these investments. But we shouldn't lose perspective on the general value of a stop loss trigger because of its performance in this particular case. The trigger is there to protect the longer-term profits that the model can generate and operates as a "fail safe" in the event that the model's other risk-management logic breaks down in a specific market environment. You should gain comfort knowing that all of the Model Portfolios are protected by a stop loss trigger.
In spite of the model's recent losses, its performance year-to-date is still on par with the S&P 500 index. And the model has still out-performed the market over the past 12-month period. Looking at the past 3-years which encompassed most of the recent bull market, the model accumulated a total return of 44.9% compared with only a 32.8% 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 286.7% compared with a Buy and Hold investor who would have earned a total return over the 7 years of only 6.2%. 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 beating the market handily during the bull markets.
- Performance Xtender 7-year Compound Annualized Return: 21.3% per year
The model triggered an increase in stock market exposure on June 18th, just after the recent correction bottomed, increasing the Large cap stock allocation from 40% to 80%. The remaining 20% of the portfolio is allocated in a money market fund.
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. The model is currently using 1.5-times leverage. The model's performance in June was just about flat as the market itself was about flat. However, the model is still up 5.8%% for the year; and over the past 12-month period, the model has gained 9.6% compared with only a 6.3% gain by the S&P 500 Index. Over the past three years, the model produced a cumulative total return of 55.5% over this bull market period -- allmost 70% more than the market produced. Looking at the past 7-year period, this model has generated a cumulative total return of 616.3% compared with the market which has done little better than break-even with a total return of only 6.2%. 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 nearly doubling the performance of the market during the bull market periods.
- Max Xtender 7-year Compound Annualized Return: 32.5% 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
Is the Correction Over?
Since last fall our commentaries have followed the deteriorating trend in the market's underlying technical condition. We have urged caution and our Model Portfolios adjusted their allocations in mid-April to become more defensive. The market finally broke down in May, dropping almost 8% before finally turning around in mid-June.
The mid-June rebound was fairly impressive and decisively pushed the S&P 500 index back above the key long-term support level at 1245 ... a level that we have said would help define whether the bull market was still alive. Importantly, the rebound also created a trading pattern called a "failed" breakdown which has reliably signaled many important upturns in the market.
But for the "failed" breakdown pattern to be technically confirmed, we need to see the S&P 500 close above the top end of the recent trading range @ 1294 ... a level that coincides with a recently important "resistance" level that stopped market rallies in January, March and the end of May.
Is This Just a Dead Cat Bounce? If the market fails to move decisively back above the 1294 level, it would set up the technical conditions for an additional downleg of the correction to develop. In other words ... the current rally would turn out to be just a "dead cat bounce" occuring within the context of a larger downtrend.
The strength of the recovery rally so far lends credence to the bullish case; and as we mentioned last month, the overall pattern of the bull market so far suggests to us that one more leg up to new highs is quite possible. But we will be watching to see if the market can break through overhead resistance at 1294 and ultimately if it can hold above the key 1245 support level. The market's action in the coming month should provide strong signals one way or the other.
Buy or Sell ? If you buy into this analysis, then the natural question is whether you should buy stocks now in order to take advantage of this rally ... or alternatively if you should take a longer-term perspective and sell out of your stock portfolio because of the market's weakened condition. But please understand that by following any of our Model Portfolios, you no longer need to be worried about such questions. 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. Then, 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 has shown increasing signs of deterioration.
If 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 and whether the analysis is right or wrong, 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 June 30, 2006 ...
| Current Recommended Portfolio Allocations | Rydex Funds | ProFunds | ETFs | |||
|---|---|---|---|---|---|---|
| Allocation | Ticker | Allocation | Ticker | Allocation | Ticker | |
| LargeCap Stock Fund | 80% | RYZAX | 80% | BLPIX | 80% | SPY |
| Corporate Bonds, or Money Market |
Money Market Fund: 20% | |||||
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 June 30, 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. | |||||
