All Private Client accounts have important updates that take effect January 1st, 2026. Please click here to learn more.

SAMPLE COMMENTARY
The information below is a sample of what we send to our clients monthly
January 2026 SMI Private Client
Strategy Update
Key Takeaways
  • The stock market rally of the past three years has been one of the most concentrated in history, with most stocks outside the "Magnificent Seven" mega-tech companies failing to participate. Despite the challenges this environment created for broadly diversified portfolios, most Private Client investors had double-digit returns in 2024 and again in 2025.
  • In November, Google and Amazon launched their own AI chips, competing with Nvidia. In December, the Fed lowered interest rates another 0.25% and initiated T-bill purchases, the newest form of Quantitative Easing (QE). The result has been a dramatic broadening of the market rally over the past 2+ months, which was, and we anticipate will continue to be, positive for Private Client investment strategies.
  • Stock Upgrading was a disappointing performer in 2025, mostly due to the Full Cycle Trend ETF (FCTE). We are optimistic that the broadening market will continue to help FCTE return to its historically strong relative performance. For January, Stock Upgrading switched from large/growth stocks to large/value in our index-switching component.
  • Sector Rotation earned +5.9% in 2025. The strategy gained over +50% from April 8 through year-end, handily outpacing the broad market over that time to erase substantial losses in the early part of the year. Sector Rotation's Metals & Mining fund has been a big recent winner, returning +6.8% in December and another +11.0% in the first six days of January.
  • Enhanced Dynamic Asset Allocation (EDAA) was outstanding in 2025, posting its best relative performance since the strategy started trading in 2013. EDAA gained +20.7% last year, especially beneficial since EDAA is the largest strategy allocation in most Private Client portfolios. Gold was a huge part of this success, gaining +64% in 2025 and +117% since EDAA bought it at the end of February 2024. The REAL Asset Allocation ETF (RAA) increased its equity allocation from 40% in December to 58% in January, offset by reductions in Fixed Income from 32% to 21% and Alternatives from 28% to 21%.
  • Private Client portfolios are more complex than those SMI recommended a decade ago. The world is changing in many ways—the reversal of globalization, negative demographic trends in developed economies, persistently higher inflation and rising interest rates, populist politics, and the emergence of a multi-polar world order amid considerable geo-political conflict. We believe the broader array of tools we now use give Private Client portfolios a better chance of withstanding the challenges presented by today's investment environment.
Dear Private Client investor,
Home-field advantage is a concept familiar to any sports fan. In the NFL, oddsmakers typically assign a 3-point advantage to the home team. In Major League Baseball's playoffs, each team's goal is to split the games played on the road with the hope of winning the majority of those played at home. Statistically, professional soccer and the NBA show the most pronounced home-field advantage, with home teams in those sports winning over 60% of the time.
We don't typically think in terms of home-field advantage when it comes to investing. But doing so offers an interesting angle on the recent—and potentially future—performance of Private Client portfolios. Since 2023, our portfolios have essentially been playing on the other "team's" home field. But there are reasons to believe that began to shift late in 2025.
Let's unpack what I mean by that. During 2022's bear market, Private Client's broad diversification and risk management processes produced a sizable performance advantage over the market indexes. In 2023, many economic factors looked recessionary, a banking crisis unfolded in March, and market conditions were clearly shaky. Right about that time, the Artificial Intelligence (AI) theme began to grab investor attention, propelling a narrow group of AI-related stocks sharply higher.
Importantly, the biggest beneficiaries of this new AI theme included the largest stocks in the U.S. market — the "Magnificent Seven" who collectively make up more than one-third of the S&P 500 Index. The stock market rally of the past three years has been one of the most concentrated in history, with most stocks failing to participate. But because investors primarily focus on the broad market indexes, which are capitalization-weighted (i.e., dominated by the performance of the largest companies), investors have viewed "the market" as strong when breadth has actually been unusually narrow.
This can be easily illustrated a few ways. At one point last year, while the major indexes were showing solid double-digit gains, just 18% of the S&P 500 stocks were beating the index (meaning 82% of its stocks were lagging it). At that time, more stocks within the S&P 500 Index were down at least -20% than were beating the index!
Looking at the past three years, investment advisor Charlie Bilello recently noted the 34% cumulative outperformance of the S&P 500 Index over the S&P 500 Equal-Weight Index was the widest of any three-year period in history. The prior record was 32% in 1997-1999. Some of you may remember what followed the last period of similar market concentration: the equal-weight index beat the capitalization-weight index the next seven years in a row.
Private Client portfolios have been carefully constructed to consider the likely performance impact of a broad range of economic and market scenarios. We don't want portfolios that excel in only one type of environment and struggle in others. We model what works when the economy is growing vs. contracting, when inflation is rising vs. falling, when bonds are moving in the same direction as stocks vs. moving in the opposite direction, as well as other factors. If you've ever looked at your Private Client portfolio and thought, "That's a lot!" you're correct! That complexity is our attempt to risk-manage a broad range of possibilities, so you safely meet your long-term financial goals.
The past three years, which favored the largest mega-tech stocks at the expense of most everything else, offered no reward for this type of risk-management and diversification. In fact, prudent risk-management was a drag on portfolio returns. Returning to our sports analogy, we were playing on the opponent's home field.
That's not to say Private Client portfolios performed poorly. In fact, most PC portfolios had double-digit gains in both 2024 and 2025. Back-to-back years of double-digit gains (or close) have all our model portfolios at all-time highs.
That said, Private Client portfolios normally excel on a relative basis when a greater proportion of stocks, both in the U.S. and globally, participate in the market's moves. Broad market participation highlights our diversification within asset classes as well as among our strategies. The seven years mentioned earlier (2000-2006) when the equal-weight (and foreign) stock indexes outperformed, were among the strongest relative performance years the SMI strategies ever had.
Narrative Shift: Google & Amazon Start Manufacturing AI Chips
Importantly, signs late in 2025 indicate a shift in the market environment may finally be underway. Two key events seemed to trigger this shift.
First, in mid-November, Google released its latest AI model, Gemini 3. This wouldn't normally be a big deal, as these new models are released regularly, with leadership in the AI race shifting from one company to another as advances occur. But this release was different. Google grabbed the AI lead with a model trained on its own chips, as opposed to the Nvidia chips that powered most previous AI models. Then, just two weeks later, Amazon launched its own in-house chip, another direct competitor to Nvidia.
Until these recent announcements, the tech giants largely stayed in their own sandboxes throughout this AI-driven bull market. Nvidia made the chips. The other AI giants were competing to come up with the best AI models (using Nvidia's chips), but each stayed in its own lanes: Google primarily focuses on search, Amazon on E-commerce and cloud computing, Apple hardware, Microsoft software and cloud computing, Meta social media, and Tesla electric vehicles. That's oversimplifying, but for the most part these companies didn't compete directly with each other.
That's clearly changed now, with Google and Amazon looking to take market share from Nvidia. Within the AI stock universe, companies in Nvidia's ecosystem started falling, while those aligned with Google soared. In other words, the AI trade splintered, and with it, the monolithic Magnificent Seven tech trade cooled rapidly. From November 1 - January 6, the Magnificent Seven stocks fell -2.0% while the rest of the market accelerated higher.
The Fed cuts interest rates and resumes QE
The second big event was the Fed's December meeting. Unsurprisingly, the Fed cut interest rates another quarter percent (0.25%). But quite surprisingly, they also announced a new program of Treasury Bill purchases — to the tune of $40 billion per month.
Here's a quick review of and some important context on this admittedly complicated subject. The Fed started its Quantitative Easing program in 2008 during the Great Financial Crisis. There have been several iterations over the years, but these programs generally involved the Fed buying Treasury Bonds in the open market to lower long-term interest rates and stimulate the economy.
Fed QE did bring rates down and helped keep them low for many years. Beyond that, the critique is mixed. Critics would say these policies did little to stimulate economic growth, while most market observers agree they dramatically boosted asset prices. Over the roughly 14 years that the Fed engaged in various types of QE, the Fed's balance sheet (an accounting of the Fed's assets minus its liabilities) ballooned nearly 10-fold, from under $1 trillion to nearly $9 trillion.
In June 2022, the Fed decided it was time to reduce its massive balance sheet and announced a new program of Quantitative Tightening (QT). The Fed let bonds it already owned mature while not reinvesting the proceeds. Over the next three-and-a-half years, the Fed reduced its balance sheet from $9 trillion to $6.5 trillion. The Fed announced at its October 2025 meeting that QT would end on December 1, 2025.
While purists disagree over whether this new Treasury Bill purchase program technically counts as new QE or not, the bottom line is the Fed flipped from being a seller of government debt (QT) to announcing nine days later that it would start buying again (albeit T-Bills rather than the T-Bonds of its QT program). More importantly, there's a well-established 16-year correlation between the Fed's purchases of government debt and the prices of financial assets rising. We've heard "but it's not QE!" arguments before regarding various programs, yet the net effect always seems to be stimulative to asset prices.
Bottom-line: Fed actions such as these are far from the only thing that matters to the market. But past actions like this have tended to drive markets higher. While the largest tech stocks usually march to the beat of their own drummer, independent of broader economic trends and factors like interest rates, the level of interest rates is always key to the broader economic picture. A new rate cut cycle is generally a boost to the broad economy, which tends to benefit the types of stocks that had been bystanders during the recent bull market.
Home-field advantage for Private Client portfolios ahead?
Over the two-plus months since the beginning of November (through January 6), there has been a notable shift in the market dynamic. The AI trade reversed lower, while the broader universe of stocks suddenly kicked into high gear. For example, the Equal-Weight S&P 500 Index mentioned earlier is up +5.3% while the standard S&P 500 Index is up just +1.8% (and the tech-dominated Nasdaq is down -0.6%).
Right on cue, we've seen confirming signs in our model portfolios. The "index switching" strategy introduced in Stock Upgrading last year pivoted from large-company growth stocks (IWF) to large-company value stocks (IWD) at the end of December, with IWD leading IWF +6.4% to -1.9% since the beginning of November. Our other large-company holding in Stock Upgrading — FCTE, which buys Quality stocks pulling back within a solid intermediate/long-term uptrend — started outperforming as well, gaining +4.6% since November 1.
Simply put, when the largest stocks in the largest indexes are winning big, it's difficult to outperform, especially while trying to exercise prudent risk management. Again, that's the market environment of the past three years — we've been playing on the opponent's home field.
But this shift since November, with more stocks participating, foreign markets, commodities and precious metals all humming as the economy anticipates rate cuts, and investors finally looking beyond the narrow AI narrative to all the other businesses they've largely ignored for years…this feels more like home-field advantage. And that advantage can be huge.
The last time SMI strategies enjoyed a sustained environment like this was 2000-2009. Over that full decade, the S&P 500 Index posted a negative total return, as many of the 1990s high-flyers came back to earth, dragging the broad indexes down with them. But then, as now, there were many unloved stocks both here and abroad that investors had ignored during the late-1990s dot-com bubble. SMI's Stock Upgrading strategy navigated those currents to post an +85% gain…despite the indexes failing to advance at all.
Let's quickly review recent activity within our strategies.
Stock Upgrading & Commodities
As noted earlier, the big move for January was the switch from large/growth stocks to large/value within our index-switching component.
Stock Upgrading was a disappointing performer (+4.2%) in 2025, largely due to FCTE and its performance difficulty (discussed in detail in the September and November updates). In short, FCTE was caught in the intersection of deep Quality and Equal-weight bear markets in 2025. Fortunately, performance improved markedly in recent months, and it's reasonable to think that the large, quality stocks FCTE focuses on may be among the first real-world beneficiaries of AI as it moves out of the laboratory and into the real world next year.
On a brighter note, Stock Upgrading had more foreign stock exposure in 2025 than anytime in the recent past. Those holdings performed well, led by GVAL, which gained +31.4% over the final nine months of 2025, handily beating the S&P 500 Index's gain of +23.1% over that span.
Another of SU's big 2025 winners—Aegis Value (AVALX)—was added last April as well. Its +49.63% gain came mostly from mining and energy stocks, more than doubling the S&P 500's return.
We're optimistic that a return by FCTE to its historically strong relative performance, coupled with the addition of the index-switching allocation, will get SU back on track in 2026.
Sector Rotation (SR)
SR gained +5.9% in 2025, which isn't great in an absolute or relative sense, but represents a substantial comeback from miserable luck back in April, when its pivot into strongly trending energy stocks was blindsided by the 1-2 punch of President Trump's tariffs and OPEC+'s announcement of rapidly increasing oil production. By April 8, SR was down -29% for the year, so turning that into a +5.9% gain by the end of the year was no small feat. SR gained over +50% from that point through year-end, handily outpacing the broad market.
SR's metals & mining fund was a big December winner, gaining +6.8% as both precious and industrial metals ramped higher—a move that continued into 2026 as that fund added another +11.0% over the first six days of January!
Enhanced Dynamic Asset Allocation (EDAA)
While SU and SR were relatively disappointing last year, EDAA was outstanding, posting its best relative performance since the strategy started trading in 2013. EDAA gained +20.7% in 2025, which helped Private Client portfolios significantly, given that it is the largest strategy allocation within most of the models.
Gold was a huge part of EDAA's success, as its +64% gain was gold's largest since 1979. This strategy has always been about staying on the right side of the market's big trends, and it has done an outstanding job of that with gold. EDAA bought 22 months ago at the end of February 2024 and has held on ever since, gaining +117% in total.
The REAL Asset Allocation ETF (RAA) launched in late February and was incorporated into EDAA almost immediately. Its first-year performance has been solid, beating its 60% stock, 40% bond benchmark +14.2% to +12.7% from inception through January 6. But sticking with our home-field advantage theme, RAA looks even better upon closer examination.
First, the 60/40 portfolio's performance is helped substantially by the fact that 2025 was the best year for bond performance of the past five. As I discussed in detail last month, we think bonds entered a secular bear market in 2021 and strong bond performance will be the exception rather than the rule going forward.
Naturally, 2025's strong bond performance helped RAA, as it owns bonds too. But make no mistake, RAA has outperformed so far despite conditions that have been much more favorable to 60/40 than RAA. Consider that in a year that is poor for bond returns, RAA can pivot into alternative asset classes (like commodities, gold, energy stocks, or strategies like managed futures that can actually short — i.e., bet against — bonds). The same is true of stocks. So winning over the past year, when both stocks and bonds were strong, was like winning on our opponent's home field...and bodes particularly well for when conditions change and RAA gets to play to its own relative strengths!
RAA made a large adjustment to its allocations for January. RAA's equity allocation jumped from 40% in December to 58% in January. Much of that came from Fixed Income, which was reduced from 32% to 21%. Alternatives dropped from 28% to 21%, with a notable decrease in commodities (6% to 1%) and energy stocks (4% to 0%). It's also interesting to note that while RAA spent much of 2025 with a 3% allocation to Bitcoin, that was trimmed to 2% for December and again to just 1% for January.
Bond Upgrading
It's too soon to draw any conclusions from the recent shift of Bond Upgrading to a new portfolio of five funds, but I encourage you to read about that important change in last month's letter if you happened to miss it. We're excited to see the improvement in this sleeve of Private Client portfolios in 2026.
Conclusion
Private Client has invested a great deal of time and effort the past two years refining the strategy mix within our model portfolios. Last month, I walked through the significant economic and market changes since COVID in explaining why we believe bond investing is going to be more challenging in the years ahead than it has been in recent decades. Those macro changes—which include the reversal of globalization, negative demographic trends in most developed economies, persistently higher inflation and rising interest rates, populist politics, and the emergence of a multi-polar world order amid considerable geo-political conflict—are likely to impact every facet of investing, not just bonds.
As a result, Private Client portfolios look quite different today than what SMI recommended a decade ago. Those changes have been carefully considered and deliberately implemented. It's recognition that the world has changed and we need to be prepared with a broader array of tools to handle the broad range of potential outcomes. Most investors are still using the playbook of the pre-COVID secular bull markets in both stocks and bonds. We think that may be a costly mistake.
Those changes to Private Client portfolios haven't paid off in better relative performance…yet. But we've been playing on the opponent's home field. When that changes, so will the narrative of our performance relative to the broad markets. That change may have begun late last year.
Blessings,
Mark Biller
Senior Portfolio Manager
SMI Private Client

Notes: For more information regarding the SMI 3Fourteen Full-Cycle Trend ETF (FCTE) or the SMI 3Fourteen REAL Asset Allocation ETF (RAA), including a prospectus, go to 3FourteenSMI.com. Always read the prospectus carefully before investing in any mutual fund or ETF.

3Fourteen & SMI Advisory Services is an affiliated company of SMI Advisory Services, the advisor to SMI Private Client. The portfolio managers of SMI Private Client also serve as portfolio managers of the SMI 3Fourteen Full-Cycle Trend ETF (FCTE).

The performance results noted in the letter above are the net returns from the model portfolio of each SMI strategy, assuming a 1% fee. Investor returns will vary based on their allocations across strategies, level of fees paid, cash flows, and differences in trade timing.

Performance numbers were obtained from a variety of sources, including Bloomberg, Morningstar, Wilshire, Standard & Poor's and SMI proprietary systems. SMI has deemed all such sources to be reliable, but no guarantee is given as to the accuracy of reported performance numbers.

The Wilshire 5000 total market index represents the broadest index for the US equity market, measuring the performance of all U.S.-headquartered equity securities with readily available price data. The S&P index is an unmanaged index commonly used to measure the performance of U.S. stocks.

The Bloomberg U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS, and CMBS.

You cannot invest directly in an index.