| Model Portfolios: | November | Y-T-D | 12 Mos. | 3 Years | 6 Years |
| Performance Xtender | 4.3 % | 5.2 % | 7.2 % | 56.6 % | 228.9 % |
| Max Xtender | 6.5 % | -6.6 % | 0.7 % | 66.3 % | 449.8 % |
| Compared to Traditional Strategy: | |||||
|---|---|---|---|---|---|
| Buy and Hold (S&P 500) | 4.0 % | 3.3 % | 6.2 % | 37.8 % | -4.6 % |
Performance Analysis
Strong Gains in November
After a very tough October, the market recovered and posted a 4% gain in November as measured by the S&P 500 Index. The renewed market strength was broadly based as most sectors participated in rally mode. In fact, this was the first month in 2005 where we've seen almost equal vigor from LargeCap, MidCap, SmallCap and Over-the-Counter (OTC) stocks.
Three Year Performance Graph (As of November 30, 2005)
The Performance Xtender: This model portfolio posted a 4.3% gain, slightly beating the market. With a 5.2% gain year-to-date and a 7.2% gain for the past 12 months, the model has managed to out-perform the S&P 500 Index in spite of the see-saw, zig-zag market we have seen for most of the year. The design of our model portfolio strategies is such that we do not expect them to beat the market during such trendless, sideways periods. But the Performance Xtender model continues to delight us with its performance ... which is why we named it the "Performance" Xtender.
But it is over longer periods of time that this model's performance really shines. Over the past 3 year period, this model has beat the S&P 500 by 50%. And over the past 6 years ... the Performance Xtender gained almost 230% compared with the S&P 500 which has not even broken even.
The Max Xtender: This model gained 6.5% during the month compared with 4% for the market. Because this model uses leverage, it should gain 1.5x to 2.0x the market during bullish periods. The leverage also makes the model more volatile and sharp losses can be experienced temporarily. Because of the see-saw, sideways market conditions of the past year, this model's logic has gotten whipsawed ... a temporary condition that nullifies the advantage of using leverage. As a result, the Max Xtender has slightly under-performed the S&P 500 Index for the past year.
But the model's use of leverage allows it to magnify its gains during periods of strong bull market conditions and also during strongly trending bear markets. As a result, this model's longer-term gains have been huge. The past 3 year period has been almost entirely a bull market period; and during this time, the Max Xtender beat the market by 75%. But since this model also makes serious money during bear markets, it is able to beat the market by even great amounts over longer periods of time that incorporate both bull and bear markets -- for example the model gained 450% over the past 6 years while the S&P 500 Index only managed a net loss of 5%.
Market Commentary
Bullish Breakout Brings New Hope
The bulls finally took charge during November, driving the stock market back up into 4-year high territory. It was the first time in all of 2005 that we have seen a real buying stampede as the large institutional investors scrambled to avoid being left behind. The market's severe breakdown in October... and then reversal... created a very bullish "failed breakdown" pattern that helped trigger investor confidence.
Fundamentally, investors were cheered by a lessening of several nagging concerns that followed in the wake of Hurricane Katrina. With the cost of crude oil dropping decisively during November, concerns about ramping-up inflation slackened. As a result, there was growing belief that the Fed could soon stop tightening interest rates. Moreover, worries about the hurricane's impact on economic growth moderated as the price of gasoline dropped and a flurry of strong economic reports suggested that Katrina's impact had been easily absorbed by the economy.
From a technical perspective, the strong influence of the 2005 trading range finally appears to have been broken ... that is, as long as any near-term market weakness doesn't cause the market to decisively fall back below the recent point of breakout. If this breakout holds, then it should usher in another leg of the bull market that began 3 years ago.
Trading Ranges and Breakouts: The above chart provides a six-year perspective on the market and demonstrates the importance of technical breakouts in defining the points where the market escapes from the limiting confines of trading ranges. Firstly, you can see that the 2000-2002 bear market trend wasn't finally broken until stocks broke out of the one year long trading range that consumed the end of 2002 and the first quarter of 2003. A year long rally followed this breakout until the market became stymied again in early 2004. Another trading range (or "correction") set in that lasted about 9 months until another successful breakout pushed the market above the top line of "resistance" that connected the various tops during the 2004 trading range.
The market advanced for only about one quarter after the late-2004 breakout before once again becoming bogged down in another trading range. We have been talking about the 2005 trading range for most of the year, since it has lasted for most of the year. A successful breakout here will set the stage for at least one more rally.
An Aging Bull Market: In spite of the buying stampede of the past few weeks, the underlying health of the bull market has weakenend. Since August, we have witnessed an increasing series of cracks in the progress of various market statistics that track the underlying demand and supply condition of stocks. The deterioration in these statistics is typical of the waning stage of bull markets historically. Adding to this is the fact that this 3-year bull market has already exceeded the average length of time for a bull and can be considered to be living on borrowed time. Last month we said:
"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)."
November's breakout seems to confirm our expectation for at least one more rally. But as we said last month, this next phase may turn out to be just the last hurrah in a long, drawn-out topping pattern. From our perspective, the critical questions at this juncture are: (1) Will this next rally be a dynamic move that allows the S&P 500 Index to challenge its old high set in 2000? Or, will the rally weaken gradually and rollover, forming a rather "flat" topping formation without adding much appreciation in market value? And (2) Once this bull market ends, will a major bear market follow or rather what amounts to just a drawn-out, multi-year correction that simply interupts the current bull market? If it is merely a correction, we would be looking at a drop in the stock market of between 25% and 40%. By contrast, if the next phase becomes a continuation of the previous bear market, we are looking at the average stock dropping probably anywhere between 50% and 75%.
When to Get Defensive: In any event, you will want to position your portfolio defensively when the downtrend gets started. Our model portfolios will remain bullishly postured as long as the uptrend continues, but will quickly move into money market funds and/or bonds when the trend breaks. The investment strategies behind each of our model portfolios aim to milk every bull market trend for as much value as possible, and then to quickly move to a defensive posture to avoid most of the depreciation during bear trends. Then in addition... during bear trends our strategies aim to make some money either by earning a safe return from money market funds or bonds, or by investing in Inverse Funds (that go short the market) or defensive sectors if they are appreciating during the bear trend.
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 |
| OTC Stock Fund | 40% | RYOCX | 40% | OTPIX | 40% | QQQQ |
| LargeCap Stock Fund | 40% | RYZAX | 40% | BLPIX | 40% | SPY |
| Corporate Bonds, or Money Market |
Money Market Fund: 5% if using ProFunds; 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 |
| Lev'd OTC Fund | 50% | RYVYX | 50% | UOPIX | 100% | QQQQ |
| Corporate Bonds, or Money Market |
ETF Investors: Note that the QQQQ and MDY positions are leveraged with margin 2 to 1 for a combined 200% exposure to the stock market. | |||||
