For the week, the Dow Jones Industrial Average (DJIA) fell 205 points (-2.02%) closing at 9931.97. For the year the DJIA is now down 4.76%. The S&P 500 lost 25 points (-2.25%) closing at 1064.88. For the year this index is now down 4.50%. The DJIA is down 12.2% from its high on April 26th and the S&P 500 is down 14.5% from its high the same day.
The Euro closed the week at $1.1973 from $1.2274. This drop has the European currency down 16.37% for the year. Major concerns for the Euro remain unabated.
Oil reversed its gains and closed down to just under $71 per barrel and gold gained nearly $7 per ounce closing the week at $1221.90. Base metals continued to drop reflecting the weak industrial demand across the world.
US treasuries gained driving the 10-year rate down to 3.2077% a fall of nearly 0.1%. Remember that a drop in interest rates reflects a gain in price and is signaling the continued flight to safety in US treasuries by investors around the world.
JOBS REPORT HAMMERS STOCKS ON FRIDAY The DJIA jumped 225 points on Tuesday after President Obama and Vice President Biden both spoke indicating that they expected a good jobs report on Friday; however, this did not materialize.
While the report showed an overall gain of 431,000 jobs, investors quickly seized upon the anemic gain of just 41,000 private sector jobs causing investors to sell going into the weekend. This report shows continued weakness in the recovery and leaves most investors wary of making big bets in stocks.
In addition to the weak jobs numbers, home sales also tumbled. While April showed a year-over-year increase of 48%, May sales fell an estimated 25% to 30% as the government's tax incentive for home buyers expired.
I think it is pretty clear that many summer purchases were pushed forward to capture the tax break and I believe that the overall housing market will continue to remain subdued this year until normal demand catches back up to the flurry of tax-incentive buying. Another hit occurred to the general sentiment of investors late on Friday when local Hungarian politicians announced their concern over that country's growing deficits. While national leaders denounced those comments, the mention of another European country at risk to a debt crisis unnerved global markets. I think it is pretty clear that investors are extremely nervous today. The news about the on-going ecological disaster in the Gulf of Mexico and questions about the impact on the economy, fears of escalating tensions in the Middle East and the Korean Peninsula, and global debt problems has heightened uncertainty. With uncertainty comes selling as investors go to the sidelines as they seek safety in bonds and precious metals. Not wanting to pile on to all the negative news, I do need to bring your attention to one other bit of bearish news that was released on Friday when the Fitch Ratings Service downgraded Connecticut's bond rating one notch from AA+ to AA citing the state's limited flexibility to fix its financial problems using means other than additional borrowing. This highlights the next major concern facing the US as more and more states fight an ever increasing burden of meeting their budgetary needs as revenues continue to fall. As I have mentioned in earlier Updates, a reduction of state spending will likely result in new job cuts and continued economic weakness. Higher taxes on all fronts is also a likely outcome adding another drag on economic growth.
With all of the negative headlines from around the world I still remain optimistic for the long-run. Bob Doll wrote in a Wall Street Journal op-ed piece today (June 8, 2010), there are lots of reasons to fear the markets right now but the long-term prospects of the United States remains among the strongest in the world. He cites the growth of US productivity as one of this country's best assets and says the relative market performance of the US compared to the world is proof of this. What Bob Doll and other market pundits cannot capture or explain is just when the markets will kick in and return to their winning ways.
The key to successful investing is patience. As has been the case for the past month or so, the indicators that I follow continue to warrant caution. The markets may be at a tipping point. A key support level for the S&P 500 is 1050. The S&P 500 has held this level since February (tested in late May and recovered) but a break below 1050 could signal a serious break with the next support level down at 990. While you may be tempted to buy right now, I think that it is imperative to wait until we see a major trend reversal. Remember that the markets do trend and until the current trend is reversed, it is better to remain cautious and hold money on the sidelines.
Rallies tend to occur in markets like this not because of strong demand but rather due to a reduction in supply. Only broad, sustained demand will turn the markets positive.
There has been no change to the broad asset class indicators that I follow. Bonds and Cash are favored so I continue to recommend investment in quality bonds, especially corporate intermediate-term. Given the current economic environment it is doubtful that the Fed will take any near-term action to raise interest rates thus keeping bonds and their yields attractive for now.
You can continue to hold strong relative strength equities, but you must be very selective and make sure your positions are the trending above their peers. If you have any questions about the strength of any holdings you may have, please give me a call and I will review each with you.
Treasuries are very strong; however, I remain extremely concerned that treasuries are very expensive at this point in time and new positions should be entered into thoughtfully.
This market will challenge every investor. Do not get impatient. As I said, I am optimistic for the long-term but don't want to get ahead of the markets. When the indicators tell us it is time to jump back in, I will tell you and relative strength analysis will signal who the new market leaders are.
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.