| Model Portfolios: | June | Y-T-D | 12 Mos. | 4 Years | 8 Years |
| Performance Xtender | -0.7 % | 4.9 % | 13.5 % | 64.4 % | 338.7 % |
| Max Xtender | -2.9 % | 4.6 % | 22.4 % | 90.3 % |
776.6 % |
| Compared to Traditional Strategy: | |||||
|---|---|---|---|---|---|
| Balanced Portfolio (60% stocks 40% bonds) | -1.4 % | 3.8 % | 14.2 % | 41.8 % | 40.1 % |
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 traditionally balanced buy and hold portfolio consisting of 60% stock funds and 40% bond funds.
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 significance of the S&P 500 Index making new all-time highs.
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
The two Model Portfolios remain somewhat defensively positioned at the present time and year-to-date have slightly edged out the performance of a typical "balanced" buy and hold portfolio of 60% stock funds and 40% bonds. In June the Performance Xtender out-performed the traditional strategy, losing only 0.7% compared with a 1.4% loss for the Balanced Portfolio. The more aggressively positioned Max Xtender lost 2.9% during the month.
The statistical logic driving the models is designed to maximize total risk-adjusted return for the long term ... over multiple market cycles. The chart below of 4-year cumulative returns demonstrates that the models have performed as expected over the full course of the recent bull market cycle that began in early 2003.
- The Performance Xtender is designed to make sure an investor beats the stock market's appreciation during bull market cycles.
- The Max Xtender is designed to deliver a multiple of the market's performance during every bull market cycle.
Four Year Performance Graph (As of June 29, 2007)
Super Performance Over Multiple Cycles: The models are further designed to generate super-charged performance over the long term by helping the investor to make serious gains during both up and down market cycles. The models can usually generate significant gains during down markets by investing in "defensive" sector funds and/or "Bear Funds" that go up in value when the market is going down. This simple approach can allow an investor to compound "profits on top of profits" over multiple cycles.
A review of the models' comparative 8-year returns is highly instructive because this period incorporates two complete market cycles --- a bear market cycle and a bull market cycle. By beating the market in bull markets and making money during losing periods, the two models have generated huge average growth rates compared to the S&P 500 Index ... which in 8 years only barely "broken even" for investors:
- Performance Xtender : 8-year Compound Annual Growth Rate - 20.3%
- Max Xtender: 8-year Compound Annual Growth Rate - 31.2%
To earn average gains such as these in spite of a punishing bear market requires a long term strategy that is also nimble enough to dynamically take advantage of changing market conditions.
Market Commentary
Are Interest Rates Reversing a 26-year Downtrend?
Executive Summary: Our models reduced stock market allocations somewhat after the severe breakdown in late February and have remained slightly defensive since then as the market recovered and re-tested the previous highs. The models also triggered a move out of bonds during June and are now parking cash in money market funds. While our statistics measuring the underlying supply/demand balance in the market show relative health, the overall market is now showing a negative momentum divergence from a level of extreme over-extension. As a result, we believe the models are postured appropriately to reflect the possibility of a new, more extensive correction, should this develop.
Interest rates have ticked up recently and our bond market timing model issued a "sell" signal on May 20th. But this most recent 1/2 percent change in rates had much more significance than other such minor wiggles.
The financial media have been talking about it. And several heavily followed bond market gurus have weighed in recently to proclaim the end of low interest rates.
Most people realize that we have been living with interest rates that are at "generational lows". In fact, interest rates have been in a declining trend pattern for 26 years since they peaked in 1981. You can look at a long-term chart of the 10-year Treasury Note and draw a very clean "trend line" that picks off each of the intermediate highs in rates (see the red line on the chart).
Even though rates moved up and down throughout this period, they always "respected" the declining trendline. As you can see on the above chart, rising rates have always respected the declining trendline as an extreme boundary. Every time the boundary has been approached, rates deflected off the line, reversed and headed in the other way.
Within the broader context of a secular downtrend in rates, there have been several multiple-year periods of rising rates ... and we are in one now that began in 2003. You can see on the chart that interest rates have also respected a rising trendline for several years now (see the rising red line).
Time for a Break
Since the two red trendlines are converging, it has been clear that interest rates would be forced to break out of one of the trends ... either the longer-term or the shorter-term trend had to end. Technical analysts in the bond market have been following this developing situation for some time.
When the 10-year Treasury Note yield dropped to 4.5% in March, there was great anticipation that interest rates were going to break the rising trendline pattern and inaugurate a new multi-year downtrend that would take rates back to historic lows. But it was not to be. Rates deflected off of the rising trendline one more time and quickly moved back up to 5% where they encountered the other trendline -- the declining long-term trendline.
This time there was a break. It happened in early June and you can see on the chart that it was a clear break as the 10-year yield moved up to 5.25%.
Confirmation is Required
Does the break clearly signal the end of the 26-year declining trend?
The break is certainly momentous. It is a very loud wake up call that the market is attempting to break out of its old pattern. There are many new pressures for rising interest rates. Central banks across the globe have been raising rates. Japan is ending its decades-long policy of adding net liquidity globally. Inflationary fears are rising as commodity prices continue their heated response to global economic growth. And the US Dollar has come under increasing pressure as US interest rates have remained low relative to international markets.
But we are not ready to finally "throw in the towel" on the prospect of lower rates. There is a possibility that the recent break is a "false breakout". If it is false, rates should reverse fairly quickly and move back below the point of breakout at around 5.0%. Were this actually to occur, it would provide a very strong signal that the attempted breakout in rates had failed and a new downtrend in rates will likely commence that could be strong enough to break down through the more recent rising trend pattern and lead to much lower rates in the future.
Before we do throw in the towel, we want to see interest rates rise enough to break through the next important technical resistance level. This level is at 5.5% for the 10-year Treasury Note (see the blue line). A clean break above 5.5% would provide strong confirmation that the 26-year downtrend is over.
- So the trend break in June was an important warning that interest rates are threatening a decades-long reversal of trend. But there is some risk that the signal is false and an important confirmation of the change in trend would be provided by a break of the 10-year Treasury Note above key resistance at 5.5% in yield.
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 stock 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 "quantitative" 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 June 29, 2007 ...
| Current Recommended Portfolio Allocations | Rydex Funds | ProFunds | ETFs | |||
|---|---|---|---|---|---|---|
| Allocation | Ticker | Allocation | Ticker | Allocation | Ticker | |
| Large Cap Stock Fund | 60% | RYZAX | 60% | BLPIX | 60% | SPY |
| 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 June 29, 2007 ...
| 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 Fnd | 50% | RYZAX | 50% | BLPIX | - | - |
| Corporate Bonds, or Money Market |
ETF Investors: Note that the SPY position is margined 1.5 to 1. | |||||
