| Model Portfolios: | October | Y-T-D | 12 Mos. | 5 Years | 8 Years |
| Performance Xtender | 2.9 % | 11.2 % | 13.2 % | 99.8 % | 337.3 % |
| Max Xtender | 1.4 % | 4.6 % | 10.3 % | 171.4 % |
744.1 % |
| Compared to Traditional Strategy: | |||||
|---|---|---|---|---|---|
| Balanced Portfolio (60% stocks 40% bonds) | -.08 % | 5.1 % | 7.4 % | 57.5 % | 41.4 % |
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: See a comparison of the Model Portfolios' performance in Bull Market and Bear Market cycles.
Market Commentary: This month we discuss why the model portfolios' remain in a defensive posture.
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
People like to say that "a picture is worth a thousand words." Here we offer two pictures to demonstrate the performance of our model portfolios in two distinctly different market environments:
- Bull Market performance since October of 2002
- Bear Market performance from March 2000 to October 2002
Both model portfolios are compared to a traditional "balanced" portfolio allocation of 60% stock funds and 40% bond funds.
Bull Market
Performance Over the Bull Market Cycle: Both model portfolios have performed as expected over the period. The Performance Xtender has generated a significant increase in gains compared to a Traditional Balanced Portfolio. And the Max Xtender used leverage to generate almost 3 times the performance, although at the expense of significant volatility.
Bear Market
Performance Over the Bear Market Cycle: Both model portfolios delivered a substantial increase in value. By contrast, a "buy and hold" investor ... holding an index fund representing the S&P 500 index ... would have lost about 45% during the 2 1/2 year bear market. An investor with a "traditional balanced portfolio" would have avoided huge losses during the period but would have still suffered a negative return.
The more significant benefit of following these model portfolios can be seen in the longer term ... over periods that are long enough to include one or more market cycles. An 8-year look back period is long enough to include both market cycles. Over this period of time, the cumulative return of the Performance Xtender (based upon a combination of live returns and "backtested" returns from computer simulation) was 337% ... about 8 times the traditional portfolio which returned a cumulative gain of only 41% in 8 years. The Max Xtender, which uses leverage aggressively to accentuate gains in both up and down markets, gained about 18 times as much as the traditional portfolio with a cumulative 8-year return of 744%.
- The simple reason behind the models' huge gains over a traditional portfolio is their ability to dynamically shift investment allocations to avoid huge losses and even make gains during bear market cycles. While a traditional portfolio will lose significant value during a bear market, the model portfolios can make money and are able to compound profits on top of profits. The cumulative benefit of such compounding becomes huge over time after one or more bear market cycles.
While the model portfolios can be more volatile than a traditional portfolio in the short-run, they are much less volatile in the long run because they can avoid the very deep losses suffered by traditional buy-and-hold strategies from which an investor can take years to recover.
Market Commentary
Model Portfolios Remain Defensive
Executive Summary: Our quantitatively-based portfolio models continue to hold lower stock market allocations as part of a defensive posture required by a "Neutral" market reading. A "Neutral" reading means there is a significantly increased likelihood of a serious drop in stock market valuations. In spite of the recent strength in US stock market averages, our statistics measuring the underlying health of the market continue to show broad deterioration, suggesting that there is still significant risk to the primary bull trend.
While the market moved back to set new highs in the Dow Industrials and S&P 500 Index, our models have stayed defensively postured. What accounts for their caution?
It has to do with the models' reading of the supply and demand conditions in the stock market since the sharp breakdown in July. Simply put, the market's rise since July has proceeded upon a very weak foundation. Investor buying has increasingly become concentrated in fewer and fewer market segments and in fewer individual stocks. Buying volume has been anemic and is periodically overwhelmed by selling volume, creating frightening new volatility.
Technical Analysis of the Current Market
From the standpoint of technical analysis, the market is struggling now to maintain the short term uptrend. The market needed to "breakout" above the previous high from early July (near 1550 on the S&P 500) and continue to hold above that level to reinforce investor confidence. But the technical breakout at 1550 quickly "failed" as the market rolled over and plunged.
The market is now trading close to "key support" provided by the 200-day moving average of the index which is widely followed by investment manangers as a primary indicator of the market's longer term trend.
To avoid violating the short term uptrend pattern, the market needs to work its way back above the 1550 level and continue to move up.
Keep an Eye on the 200 Day Moving Average
However, if the market breaks decisively below the 200-day moving average, it will signal a new downtrend in the market on at least a short-term basis.
But the longer term uptrend pattern of the market will remain intact technically until the market violates the Long Term Uptrend Line (in green) on the downside. This longer term trendline has supported the market's "dips" for over three years now. As such, it is the best indicator we have to define the ongoing bull market in stocks.
Model Portfolios Postured for Heightened Market Risk
Our models read the current deterioration in the market's statistics with an objective eye and conclude that the risk in stock market valuations has gone up substantially.
That is why the models have remained defensively postured since the volatility spike in July/August. They will remain so until they see much more broadly-based participation in the market upswing combined with healthier levels of upside volume that suggest a return of broad and deep participation.
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 October 31, 2007 ...
| Current Recommended Portfolio Allocations | Rydex Funds | ProFunds | ETFs | |||
|---|---|---|---|---|---|---|
| Allocation | Ticker | Allocation | Ticker | Allocation | Ticker | |
| Large Cap Stock Fund | 30% | RYZAX | 30% | BLPIX | 30% | SPY |
| Energy Sector Fund | 20% | RYEIX | 14% | ENPIX | 20% | XLE |
| Precious Metals Fund | 10% | RYPMX | 7 % | PMPIX | 10% | GLD |
| Corporate Bonds, or Money Market |
40% Money Market Fund . ProFunds investors should have 49% 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 October 31, 2007 ...
| Current Recommended Portfolio Allocations | Rydex Funds | ProFunds | ETFs | |||
|---|---|---|---|---|---|---|
| Allocation | Ticker | Allocation | Ticker | Allocation | Ticker | |
| UnLev'd LargeCap Fnd | 100% | RYZAX | 100% | BLPIX | 100% | SPY |
| Corporate Bonds, or Money Market |
ETF Investors: Note that the SPY position is un-margined. | |||||
