For the week, the Dow Jones Industrial Average (DJIA) lost 307 points (-2.94%) closing at 10,144. The S&P 500 lost 3.65% closing at 1077 flirting again with the important support level of 1050. For the year the DJIA is now down 2.73% and the S&P 500 is down 3.44%.
Oil rallied and closed the week at $78.86 reflecting concerns over low gasoline inventories in the US and a brewing storm in the Gulf of Mexico that could possibly disrupt oil production and refinement in this critical region. Gold gained just over $27 per ounce closing the week at $1256.20. Gold rallied on the negative economic data reported during the week. Base metals continued to rebound strongly following the appreciation of the Chinese yuan.
Prices of US treasuries gained and sent the 10-year rate down to 3.1096% from last Friday's close of 3.2328%. This interest rate is the lowest Treasury yield weekly close so far in 2010 and reflects continued concerns about US and global economic growth. Corporate bonds also showed strength and most bond categories gained in value during the week.
ECONOMIC CONCERNS RESURFACE
As I discussed last week, investors are searching for confirmation that economies around the world are stabilizing and growth is returning.
This search hit a snag as the US government revised the final 1st Quarter GDP number down to 2.7% from April's initial report of a 3.2% gain. Additionally, new home sales in May reached a record low and with inventories of existing homes at very high levels, it may take several years to restore a balance in supply and demand within this important sector. Capping all of this news was the Federal Reserve's statement on Wednesday which was interrupted to suggest that economic growth, while present, is not particularly robust and that low interest rates will be with us for the foreseeable future. Internationally, the cost of insuring Greece's sovereign debt has reached record levels implying that private investors now consider the likelihood of default within the next 5 years at 69%. This makes Greece the second worst bet (behind Venezuela) among all countries.
POLITICS AND THE ECONOMY
The long-anticipated Financial Reform Bill emerged from conference and appears ready for the President's signature.
Bank stocks rallied on Friday after initial details revealed that some of the most draconian constraints on banking were reduced or eliminated. As far as the long-term impact on the financial system, we will have to follow Sen. Dodd's observation when he suggested that we would have to wait and see how the 2000+ page bill works out.
The G20 Summit has been taking place over the weekend in Toronto and it appears that a general consensus has emerged where the world leaders have agreed to take steps to reduce debt levels in half by 2013 and that countries should not rapidly withdraw stimulus spending until economic growth is firmly in place. A key differential is that countries like Germany plan to reduce their deficits by austerity measures, while the US expects economic growth to help reduce the percentage of deficits in relation to GDP. Most developed countries agreed that a global bank tax should be imposed to help pay for the bailouts to these banks; however, Canada, Brazil and India oppose this measure. It remains to be seen if any of these goals will be met. China was praised for allowing the yuan to float and help generate exports to that country. I will be following the yuan now over the weeks and months to come to see if our exports improve as a result.
My generally cautious outlook on markets remains in place and I believe that it is better to take a more conservative position and give up opportunity rather than risking the loss of capital at this time.
There are many different opinions about the direction of the economy and for each economist who believes there is a chance of a second recession (double dip) there is an economist who believes that corporate profits will rise dramatically next year and we could see strong market growth. I reiterate that I do not know which view will prevail, but I will react accordingly. One of the very big advantages to following a relative strength strategy is that this investing strategy is not based on a hunch or gut instinct, but rather firm data points indicated by the analysis provided by Dorsey Wright & Associates (DWA).
Currently major indicators continue to support over-weighting cash and bonds while some equity positions can be taken in technically sound investments. An encouraging sign last week was that as the major indexes lost across the board, the underlying technical indicators like the New York Stock Exchange Bullish Percent (NYSEBP) did not lose and remained steady.
The markets are presently range bound. The DJIA has support at 9800 and resistance at 10,900, while the S&P 500 has support at 1050 and resistance at 1170. In other words there is simply no clear direction in the markets.
Favored sectors include Aerospace Airline, Machinery and Tools, Real Estate, Restaurants, and Savings & Loans. Only strong technical positions should be entered in these or any sector. Broad market investments continue to favor the small and mid cap sectors in the US; and internationally, emerging markets continue to show greater relative strength over developed ones.
I continue to hold my opinion that while treasuries are strong, they are very expensive at this point in time and new positions should be entered into thoughtfully. Corporate intermediate-term bonds remain favored.
Corporate bonds contain elements of both interest rate risk and credit risk. Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and if held to maturity, offer a fixed rate of return and fixed principal value. U.S. Treasury bills do not eliminate market risk. The purchase of bonds is subject to availability and market conditions. There is an inverse relationship between the price of bonds and the yield: when price goes up, yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income.
As always, if you have any specific questions on your portfolio or wish to talk to me, please do not hesitate to call.
P.S. If you think this type of analysis would be of benefit to anyone you know, please share this communication with them.
Paul Merritt, MBA, AIF(R). CRPC(R) Principal NTrust Wealth Management
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. Securities and Advisory Services offered through Commonwealth Financial Network(R), Member FINRA/SIPC, a Registered Investment Adviser.