| Model Portfolios: | November | Y-T-D | 12 Mos. | 5 Years | 8 Years |
| Performance Xtender | -5.0 % | 5.7 % | 5.5 % | 81.9 % | 282.1 % |
| Max Xtender | -6.4 % | -2.1 % | 0 % | 98.8 % |
557.1 % |
| Compared to Traditional Strategy: | |||||
|---|---|---|---|---|---|
| Balanced Portfolio (60% stocks 40% bonds) | -2.8 % | 3.2 % | 3.7 % | 48.8 % | 41.3 % |
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 look at the history of our primary market timing calls and the two most recent timing signals that occurred in the past month.
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 During the Most Recent Bear Market Cycle:
Both model portfolios delivered a substantial increase in value during the Bear Market of 2000 through 2002. 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 two or more market cycles. An 8-year look back period is long enough to include both of the two most recent 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 282% ... about 7 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 13 times as much as the traditional portfolio with a cumulative 8-year return of 557%.
- 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 Stay Cautious
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 bounce 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.
Our models moved to a fully "bearish" reading this month after having turned defensive in late August. As a result, all portfolio stock market allocations were reduced to zero. This is only the second time the models have turned fully bearish in five years. You should note that this signal has been effective in getting us out of stocks just before all of the major bear market slides of the past ten years.
But the signal has not always marked the beginning of Bear Markets. When the signal has been quickly reversed, as it was this time (as of the December 3 Trade Alert), the signal has sometimes marked the "bottom" of a major correction. That's what could be happening this time. But since the 5-year Bull Market cycle has already gone on too long by historical standards ... and because the US economy seems perched on the edge of a recession right now ... we are inclined to think that we are in a transition period between the end of a Bull Market and the beginning of a Bear Market.
The current period of transition could be similar to that which played out between March and October of 2000 as the "tech stock bubble" was bursting and the US stock market ended a decade-long bull market cycle. During that earlier period of transition, we had an initial Bearish "OUT" signal reversed by a Neutral "IN" signal which was then followed by another Bearish "OUT" that successfully signaled the beginning of a 2 1/2 year Bear Market.
History of Our Primary Market Timing Signal
We have used the market timing signals plotted on the chart above since the mid-1990's. The timing model's primary purpose has been to tell us when to get out of the stock market altogether ... and when it is safe to establish an initial position in stocks after a decline.
You can see that the timing model produced a signal to get "IN" the market before every long-term uptrend in prices. It also produced very timely signals to get "OUT" before every long-term decline.
Although the signals aren't perfect, we have learned from experience to take them seriously. And when some of the signals have been wrong, they were quickly reversed.
How to Confirm the Onset of a Bear Market
Since the "OUT" signal in November was quickly reversed by an "IN" signal on December 3rd, the question now is whether to sound the "all clear" and move wholeheartedly back into stocks.
But this latest "IN" signal is based only on a "Neutral" market reading which allows some of our Model Portfolios to re-establish limited stock market allocations only. This is because the "Neutral" reading still calls for a very defensive position relative to stock market risk. And the new signal was triggered by the most sensitive trend indicator within the model which could be easily reversed again by any significant resumption of the previous downtrend.
So we expect there is a reasonable liklihood that the recent "IN" signal could be reversed by a new "OUT" signal.
In the meantime, you can keep an eye on the 200-day Moving Average of the S&P 500 Index (which is easy to do yourself on most simple stock market graphing tools on financial websites). If the market can move back above the moving average, and hold above it, then there is a good chance that the market will continue to move up from there and seek to make new highs.
However, if the market moves up to the moving average and then rolls over into another decline, then in all liklihood the market will drop to technical support at the LongTerm Trendline (in green on the chart) around 1370 on the S&P 500 Index.
You can confirm the onset of a probable new Bear Market yourself by noting whether the S&P 500 breaks through the green Long Term Trendline. A break of the Long Term Trendline at 1370 will provide technical confirmation of a "break in trend" and signal the inauguration of a new longer term downtrend.
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 on the buy side combined with healthier levels of upside volume that suggest a return of broad and deep participation in the market.
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 December 3, 2007 ...
| Current Recommended Portfolio Allocations | Rydex Funds | ProFunds | ETFs | |||
|---|---|---|---|---|---|---|
| Allocation | Ticker | Allocation | Ticker | Allocation | Ticker | |
| International Stocks | 40% | RYEUX | 40% | UEPIX | 40% | IEV |
| Corporate Bonds, or Money Market |
60% Money Market Fund . | |||||
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 December 3, 2007 ...
| Current Recommended Portfolio Allocations | Rydex Funds | ProFunds | ETFs | |||
|---|---|---|---|---|---|---|
| Allocation | Ticker | Allocation | Ticker | Allocation | Ticker | |
| International Stocks | 50% | RYEUX | 50% | UEPIX | 50% | IEV |
| OTC Stock Fund | 50% | RYOCX | 50% | OTPIX | 50% | QQQQ |
| Corporate Bonds, or Money Market |
. | |||||
