| Model Portfolios: | August | Y-T-D | 12 Mos. | 3 Years | 6 Years |
| Performance Xtender | -1.5 % | 1.3 % | 13.1 % | 59.5 % | 259.2 % |
| Max Xtender | -3.7 % | -8.5 % | 15.8 % | 108.1 % | 617.6 % |
| Compared to Traditional Strategy: | |||||
|---|---|---|---|---|---|
| Buy and Hold (S&P 500) | -1.1 % | 0.4 % | 10.2 % | 37.6 % | -22.2 % |
Performance Analysis
August Losses Partially Offset July Gains
After strong gains in July, the stock market turned weak in August losing 1.1% on the S&P 500 Index. MidCap, SmallCap and technology stocks under-performed slightly losing about 1.5% in average value. International LargeCap stocks out-performed climbing 1.8%.
The Performance Xtender: This model portfolio slightly under-performed the market during August, losing 1.5% in value. But so far this year, it has slightly over-performed with a net gain of 1.3%. You can see from the table above, the Performance Xtender is also about 28% ahead of the market over the past 12 months and has significantly out-performed over the past 3-year and 6-year periods.
As of the end of August, this model is fully invested in the stock market with a split allocation: 40% International stocks, 40% MidCaps and 20% SmallCaps. MidCap and SmallCap stocks continue to lead the market’s momentum. And during August, the model switched out of LargeCap stocks into International LargeCap stocks to capture the stronger relative performance of stocks overseas.
The Max Xtender: This model is fully invested and using 100% leverage. As a result, it had a huge gain last month when the market was up; but this month it lost 3.7% while the market was down 1.1%. If the market provides at least several more months of positive trend, this model should come back smartly and out-perform for the year as it usually does. Looking at the past 12-month period, this model has out-performed the market by 55%. And its relative performance vs. the S&P 500 has been even better over the past 3-year and 6-year periods.
As of the end of August, this model is positioned at its most aggressive setting. Using 100% leverage and positioned in the more volatile mid cap and small cap sectors, this model is set to fly … if the market cooperates here with more upside action.
Three Year Performance Graph (As of August 31, 2005)
Bull Market Performance: The chart above depicts the past 3 years ... most of it a bull market period. Both of our investment models significantly out-performed a Buy and Hold strategy during this time. This is as it should be since the models were designed to strongly out-perform during bull markets. But you can see from the chart above that our models’ performance has been fairly “flat” since the first part of 2004. This is because the market has been flat … and trading essentially sideways for most of that period. During such sideways, see-saw periods in the market, our models will typically either under-perform the market slightly or beat it by a small margin. It is during the strongly trending bull market and bear market periods that our models will substantially out-perform.
Market Commentary
September Will be a Critical Month
In our commentary last month, we noted that the market probably needed to take a breather after breaking out to new 4-year highs. We also suggested that it would be critical for the market to avoid a serious reversal while it was taking a much needed rest.
July’s gains had been propelled by a flurry of good fundamental indicators of a strengthening economy combined with a turndown in the price of crude oil. However, by the end of July, crude oil was once again moving up and breaking up to new, all-time highs. The renewed specter of rising energy costs may explain the severity of the stock market’s reversal during August.
Then came the hurricane disaster on the Gulf coast. The potential impacts from this extreme event are only beginning to be thought through. It is impossible at this juncture to predict how the market will respond. But suffice it to say that this extremely negative event comes at a time when the bull market is beginning to show signs of maturity and is already vulnerable. If the market cannot recoup its positive momentum here soon, the market may turn down either in a deep correction or the beginning of a new bear market trend.
Technical Analysis: This month’s chart looks again at the 2005 Trading Range that has defined market action throughout the year ... bouncing between a Support Level boundary at 1165 and a Resistance Level boundary at 1220 on the S&P 500 Index. Last month we focused on the market’s break-out above the Resistance Level at 1220 and the establishment of new 4-year highs. We noted that to continue this bull market rally, the market needed to successfully “test the point of breakout” at 1220 – meaning that the market needed to hold above this level. We expected there to be some profit-taking and a minor correction that would hold above 1220.
What we didn’t want to see was a market reversal that broke down below the point of break-out at 1220. This type of market pattern would constitute the first step in creating a “failed break-out” pattern which is a very bearish signal. As you can see on the chart, we had an earlier failed break-out pattern in early March that triggered a sharp drop. Then, on the flip side, we had a “failed break-down” pattern (a bullish signal) develop in late April that triggered the bull rally starting in May.
Now we are looking at the possibility of another failed break-out. To nullify the signal, the market needs to quickly move back above the critical 1220 level on the S&P 500 – and hold it! On August 31st, the market did close back above 1220. Now it needs to move ahead and stay above 1220. Or, look out below …
An Aging Bull Market: Our longer-term technical indicators of the market’s strength are still fairly positive. But they are showing some signs of deterioration which are typical of an aging bull market and indicate increasing vulnerability. The most apparent indication of developing market weakness is the lagging performance of technology and LargeCap stocks. In fact the 30 Dow Jones Industrial “blue chip” stocks have been very weak. Meanwhile, the SmallCap and MidCap stock sectors continue to show the strongest positive momentum. This is the same pattern of deterioration that developed in 2000 as the historic bull run of the 1990’s came to an end. Looking back much farther into market history, it has been more typical for LargeCap stocks to hold up strongly near the end. But as the underlying nature of our economy has changed in recent decades, it may not be surprising to see the smaller, more entrepreneurial stocks holding up better near the end.
In any event, the market’s action during September will be critical for defining the remaining course of the bull market that started back in March of 2003. The market’s underlying technicals and fundamentals are still fairly strong. But the impact of the hurricane disaster is just beginning to develop. We will need to see the market hold and stay above the important 1220 level or prepare for a new downtrend in stocks. If the market cannot hold above 1220 at this stage, the next lower, important level of support will be defined by the 200-Day Moving Average line (the green line on the chart).
Recommended Model Portfolio Allocations
Model Portfolio: 'Performance Xtender'
| Current Recommended Portfolio Allocations | Rydex Funds | ProFunds | ETFs | |||
|---|---|---|---|---|---|---|
| Allocation | Ticker | Allocation | Ticker | Allocation | Ticker | |
| SmallCap Fund | 20% | RYAZX | 20% | SLPIX | 20% | IWM |
| MidCap Fund | 40% | RYAVX | 40% | MDPIX | 40% | MDY |
| International Stocks | 30% | RYEUX | 40% | UEPIX | 40% | IEV |
| Corporate Bonds Money Market |
If you are following this Model Portfolio with Rydex investments, you should keep the remaining 10% balance in a Money Market account. | |||||
Model Portfolio: 'Max Xtender'
| Current Recommended Portfolio Allocations | Rydex Funds | ProFunds | ETFs | |||
|---|---|---|---|---|---|---|
| Allocation | Ticker | Allocation | Ticker | Allocation | Ticker | |
| Lev'd SmallCap Fund | 50% | RYTNX | 50% | UAPIX | 100% | IWM |
| Lev'd MidCap Fund | 50% | RYTNX | 50% | UMPIX | 100% | MDY |
| Corporate Bonds Money Market |
Note: Since Rydex does not offer leveraged funds for either SmallCap or MidCap stocks, we have substituted a leveraged LargeCap fund, RYTNX. | |||||
