November, 2005 Newsletter

Monthly Tracking Report ( As of October 31, 2005 )

Model Portfolios:	October	Y-T-D	12 Mos.	3 Years	6 Years
Performance Xtender	-4.5 %	0.9 %	8.6 %	56.8 %	243.1 %
Max Xtender	-4.2 %	-12.3%	5.2%	99.6 %	520.7 %
Compared to Traditional Strategy:
Buy and Hold (S&P 500)	-1.8 %	-0.7 %	7.2 %	37.7 %	-4.7 %

Performance Analysis

October Posts Losses

October lived up to its bearish reputation one more time. The S&P 500 Index broke down through key support levels early in the month and lost close to 5% in value at one point. But then it staged a recovery and traded higher toward the end of month, ending down a net 1.8% for the month. As such, the market remains stuck in the trading range that has defined the market's action for all of 2005.

The Performance Xtender:  This model portfolio posted a 4.5% loss in October after a string of strong months. This has been our strongest performing model of the year; but this month's loss dramatizes the fact that it can be somewhat volatile in the short-run (even though it has proven to have a low volatility from a longer-term perspective). The model's shorter-term volatility is a function of its more extensive reliance upon individual market sector performance. Individual sectors tend to be more volatile than the broader stock market averages. In addition, this month's sector market action was somewhat unusual in that our "defensive" sector investments in Energy and Gold went sharply down this month in concert with the drop in the broader market. Gold and Energy are called "defensive" sectors because they typically move in the opposite direction as the market. This is generally true over longer stretches of time, but not so consistently true month to month. This was one month when the typical pattern didn't play out. But understand that over the longer run, this model's more extensive reliance on individual sectors is one factor that allows it to extend performance.

The Max Xtender:  This model is inherently volatile by design; and its 4.2% loss in October was consistent with the 1.8% loss in the broad S&P 500 Index.

Three Year Performance Graph (As of October 31, 2005)

Market Commentary

The Tale of the 2005 Trading Range

In early September, the market broke above the upper band of the trading range which has been in force for most of 2005. Breaking above the key 1220 level on the S&P 500 Index, the market appeared to have broken free and ready to progress into the next leg of the bull market rally. But in September and October, the trading range reasserted its influence and the market's breakout "failed" as the S&P 500 traded back down through the 1220 level once again.

The strong influence of the 2005 trading range would seem to make it appropriate once again to focus our discussion on the dynamics of trading ranges and the particular tale told this year by the trading range defined by an upper "resistance" level at 1220 and a lower "support" level at about 1164.

Let's talk about trading ranges. A trading range is a way that technical market analysts describe a "bounded congestion zone" in a market. These bounded zones tend to contain the market action for a period of time while neither bulls nor bears can get the upper hand. Trading ranges are inherently sideways, see-saw types of affairs and they can also slope downwards somewhat in a formation known as a "flag". Trading ranges typically describe a period of correction contained within a larger-scale bullish or bearish trend; or, they can play out as a topping formation at the end of a bull market or conversely as a bottoming formation at the end of a bear market.

The chart immediately above shows two very cleanly defined trading ranges in a purely horizontal orientation. Note that the term "resistance" refers to the price level above which the market has difficulty moving. Conversely, the term "support" refers to the price level that tends to provide a floor beneath which the market does not fall. Typically, when the market successfully "breaks out" above the resistance level as shown above, the bull market will reassert itself. However, sometimes a breakout will "fail" when the bull market trend fails to reassert itself and the market falls back down beneath the resistance level. As we have mentioned previously, these "failed breakout" patterns are a very bearish signal and tend to be followed by a sharp drop in prices. (Note that the same principal applies to "breakdowns" through a support level in a trading range. Such breakdowns are typically followed by a bear trend except when the breakdown "fails", creating a "failed breakdown" pattern which is a very bullish signal).

Here is a picture of the 1999-2000 trading range that appeared as a topping formation at the end of the 1990's bull market. You can see that the market broke above resistance initially in late-1999 and then spent a year trying to stay above it. However, the bull market failed to reassert itself and the market eventually broke back down and created a "failed breakout" signal that marked the end of the bull market.

• You can see the strong resemblence between the 1999-2000 trading range and the 2005 trading range.

Failed Breakouts and Failed Breakdowns Define 2005: The 2005 trading range appears to be a topping formation; and the market's action during 2005 has been defined by a series of failed breakout and failed breakdown patterns. Each time that the market has failed to sustain a break outside the bounds of the trading range (and/or the 200-day moving average), the resulting failure has triggered a sharp move in the opposite direction.

• For most of the year our longer-term indicators of the market's supply/demand condition have been positive, so our orientation has been to look for a sustained break above the trading range and a continuation of the bull market. But since August, these same indicators have registered serious deterioration, leading us to be wary of a sustained breakdown that could lead to the next bear market.

Another Bullish Signal: But a sustained breakout or breakdown has yet to occur ... and the trading range is still in force. The bullish "failed breakdown" signal of a week ago gives rise once more to hope that a sustainable break above the trading range could occur next. In support of that notion, the S&P 500 even closed back above the key 1220 resistance level. So, we must now give credence to a possible bullish scenario playing out over the next several months. Also, the so-called "seasonals" support this possibility since November and December are historically very bullish months.

At this stage of the game, the market's patterns, relative age and underlying health all suggest that we are dealing with a drawn-out topping pattern and that it is not likely that the 2005 trading range will be eclipsed for very long or by very far. We are probably looking at the terminal stages of this bull ... and while we may see one last rally to end the year, the year 2006 may be defined by the beginning stages of a new bear market (or rather as a continuation of the long-term bear market that began in 2000).

Recommended Model Portfolio Allocations

Model Portfolio: 'Performance Xtender'

Current Recommended Portfolio Allocations	Rydex Funds		ProFunds		ETFs
	Allocation	Ticker	Allocation	Ticker	Allocation	Ticker
Gold Stocks Fund	20%	RYPMX	15%	PMPIX	20%	GLD
International Stocks	30%	RYEUX	40%	UEPIX	40%	IEV
Corporate Bonds, or Money Market	Money Market Fund: 50% if using Rydex Funds; 45% if using ProFunds; or 40% if using Exchange Traded Funds. Also for ETF investors, we recommend using a gold stock fund rather than the ETF 'GLD'.

Model Portfolio: 'Max Xtender'

Current Recommended Portfolio Allocations	Rydex Funds		ProFunds		ETFs
	Allocation	Ticker	Allocation	Ticker	Allocation	Ticker
Lev'd MidCap Fund	50%	RYTNX	50%	UMPIX	100%	MDY
Corporate Bonds, or Money Market	Money Market: 50% unless using ETFs. Note: Since Rydex does not offer leveraged funds for MidCap stocks, we have substituted a leveraged LargeCap fund, RYTNX.