Monday, April 12, 2010

MARKET UPDATE April 11, 2010

Markets, both domestic and global, posted weekly gains amid crosscurrents of news and data. Greece, gold and oil all had an impact during the week. Bernanke spoke on Wednesday warning of rising deficits, and Treasury yields rose slightly after a solid auction.

The Dow Jones Industrial Average (DJIA) and S&P 500 closed the second week of April up 0.64% and 1.38% respectively. The DJIA briefly broke through 11,000 but closed the week at 10,997.35. This marks the sixth straight week of gains for both major US indexes. For the year the DJIA is up 5.46% and the S&P 500 is up 7.11%. The MSCI EAFE (World) closed up 0.33% for the week (its third consecutive week of gains), and for the year this broad international index is up 1.83%.

International Equities Return to Favored Status

As most of you know, I follow the technical analysis provided by Dorsey, Wright & Associates (DWA). One of the primary indicators I watch is the Dynamic Asset Level Investing (DALI) report (please click on the About Us tab to the left for a more detailed discussion) which evaluates five broad investment categories. On February 4, 2010, International Equities was removed following a 297 day run. This past Monday, International Equities returned to join US Equities.

It is easy to look back at such changes in hindsight and see that this time around we would have actually been better off staying invested in the International Equity market; unfortunately we never know how things are going to unfold when the change actually occurs. If we think back to back to early February there was a tremendous amount of concern and angst with respect to the credit worthiness of countries like Greece, Portugal, Spain and Ireland. The International Equity area was not the most stable asset class at the time, and with the strength of the US Dollar, International Equities were adversely affected.

There was no telling if this move out of International Equities was going to play out like 2008 when International Equities was removed in January and stayed out of DALI for an entire year. During this time the MSCI EAFE (World) Index was down just over 45% and 3 of the 4 countries that make up the BRIC countries were off more than 50%. The key to investing is to avoid big losses and DALI is a tool to help us do just that. This time, we lost a little on the trades, but next time it may prevent larger losses stemming from a major sell-off.

Greece, Gold, Oil and Treasuries

Concerns about Greece’s ability to meet its financial obligations without a bailout from the International Monetary Fund sent that country’s 10-year bond yield to 7.1%--a rate now 2.2 times greater than an equivalent bond in Germany. Adding to investor worries, the rating service, Fitch, announced on Friday that they were reducing Greece’s bond rating to BBB-minus its lowest investment-grade rating with a negative outlook. Reassurances by European Union leaders kept the problem from getting worse. Even with outside aid, many investors are beginning to believe this problem will not be resolved for a very long time. The Euro managed a slight gain of $0.0005 but was clearly held back by the news from Greece. The problems affecting Greece are dragging the entire region down and I am avoiding the European Zone with international investments.

Gold rallied despite a strong US Dollar primarily in response from European investors who are looking to hedge the Euro. As pressure in Greece lessened somewhat on Friday, so did the upward pressure on gold. If Greece continues to flounder, expect gold to resume its upward movement.

Oil prices also rose early in the week only to see a pull back on news of sizeable supply inventories. May futures closed Friday in New York at $84.92 per barrel after reaching nearly $87 early in the week. Many oil company stocks have rallied recently and I will be looking to add exposure to this sector if the price of oil holds.

US Treasuries rallied at the end of the week with a strong 10-year auction. Earlier in the week, the yield on the 10-year Treasury briefly exceeded 4% only to pull back and close the week at 3.8825% down from last week’s close at 3.9426%. The Dow Jones Corporate Bond Index was nearly unchanged and continues to move sideways in a very narrow band. Fed Chairman Bernanke spoke last Wednesday to the Dallas Chamber of Commerce and said that “unless we as a nation demonstrate a strong commitment to fiscal responsibility, in the longer run we will have neither financial stability nor a healthy economic growth.” I share this concern; however, I do not believe the markets are looking that far into the future. Eventually the US must face the same decisions as Greece is today: cut spending, raise taxes, or both.

Looking Ahead

As I noted earlier, the major US markets are on a six week positive run and the technical indicators are all positive. There has been no change in my favored sectors and they are Real Estate, Consumer Discretionary, Information Technology, Financials and Materials. Small and Mid Cap stocks continue to be favored over Large Cap stocks—a relationship that has been in place since the markets began their turnaround a year ago. The New York Stock Exchange Bullish Percent (NYSEBP) is at a yearly high of 77.24 and at a level not seen since last September. The NYSEBP is not predictive, but it signals that there is greater risk in the market today. Easy gains are likely to be harder to come by and particular focus must be given to individual stocks and sectors.

While International Equities have returned to a favored status, emphasis is on the non-developed parts of the world. The top four countries on a relative strength basis are Turkey, Thailand, South Korea and Brazil. I continue to avoid the European developed markets which represent the bottom 13 countries and indexes of the 33 found in my iShare International Relative Strength matrix.

I still prefer US Corporate Intermediate-term Bonds and International bonds in the fixed-income area.

As always, if you have any specific questions on your portfolio or wish to talk to me, please do not hesitate to call.

Paul L. Merritt, MBA, CRPC® Principal NTrust Wealth Management

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Past performance is not indicative of future results and there is no assurance that any forecasts mentioned in this report will be obtained. Technical analysis is just one form of analysis. You may also want to consider quantitative and fundamental analysis before making any investment decisions.

Information in this update has been obtained from and is based upon sources that NTrust Wealth Management (NTWM) believes to be reliable, however NTWM does not guarantee its accuracy. All opinions and estimates constitute NTWM's judgment as of the date the update was created and are subject to change without notice. This update is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities must take into account existing public information on such security or any registered prospectus.

The bullish percent indicator (BPI) is a market breath indicator. The indicator is calculated by taking the total number of issues in an index or industry that are generating point and figure buy signals and dividing it by the total number of stocks in that group. The basic rule for using the bullish percent index is that when the BPI is above 70%, the market is overbought, and conversely when the indicator is below 30%, the market is oversold. The most popular BPI is the NYSE Bullish Percent Index, which is the tool of choice for famed point and figure analyst, Thomas Dorsey.

All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poors. The Dow Jones Industrial Average is based on the average performance of 30 large U.S. companies monitored by Dow Jones & Company. The Dow Jones Corporate Bond Index is comprised of 96 investment grade issues that are divided into the industrial, financial, and utility/telecom sectors. They are further divided by maturity with each of the sectors represented by 2, 5, 10 and 30-year maturities. The Morgan Stanley Capital International (MSCI) Europe, Australia and Far East (EAFE) Index is a broad-based index composed of non U.S. stocks traded on the major exchanges around the globe.

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