Tuesday, June 15, 2010

Weekly Market Update - June 14, 2010

The US markets rallied this week with an especially strong Thursday giving the Dow Jones Industrial Average (DJIA) its first up week in a month.

For the week, the DJIA gained 279 points (+2.81%) closing at 10,211. The S&P 500 also gained 2.51% closing at 1192. Nine trading days into June (of 22) the DJIA is up 0.73% and the S&P 500 is up 0.20%.

The MSCI (EAFE) World gained 1.06%, but this broad international index continues to trail both major US indexes on a relative basis. For the month, the MSCI (EAFE) is still in negative territory down 0.3%. The Euro rebounded a bit closing the week at $1.2116 up from last week's close of $1.1973. Oil pulled back on Friday to $73.78 after rising to over $75 per barrel on Thursday. Some analysts I follow suggested that this downward move in oil was attributed to the negative retail sales number that came out Friday morning fueling (no pun intended) concerns that economic growth is not as substantial as hoped. It appears that the price of oil is becoming a barometer of anticipated future economic growth rather than being based upon traditional supply and demand fundamentals. Gold gained just over $8 per ounce closing the week at $1230.20. Yet again it appears that gold is gaining as an attractive alternative to stocks and currencies. Base metals rebounded strongly on news of China's good export data renewing optimism that this largest consumer of metals such as copper, nickel, and lead would resume buying after a month or two slow down. Prices of US treasuries fell slightly pushing the 10-year rate up to 3.2328% from 3.2077%. Treasury prices did rise on Friday after the release of the retail sales numbers. For the week, strongest gains in bonds were found in long-term US treasuries, investment grade corporate bonds, and emerging sovereign debt.

STOCKS STABILIZE

As noted, the DJIA found a return to winning ways this past week with the year's second best weekly gain. The S&P 500 had its fourth best week.

The rally was attributed to strong export data reported by China. As the world's manufacturer, investors believe that the strong export data reflects continued global demand for products and is a leading indicator of economic strength elsewhere. With this news, money rushed into the markets driving up stock prices and reversing, for now, a negative trend in the markets. Additionally, a slightly favorable report on new jobless claims helped fuel the rally. Investors are hanging on any news to get confirmation that the US and global economies are recovering.

NEWS FROM CHINA AND ELSEWHERE

The stronger than expected export data reported by China this past week certainly pleased investors. What was less auspicious was the report that China's inflation grew at an annualized rate of 3.1% in May.

The Chinese government has a publicly stated policy of keeping inflation at or below 3%; but with recently approved wage increases for workers throughout China and negative real interest rates, there is going to be increasing demand on China to raise interest rates and slow their robust economy. This is an important story I will be following closely.

A report released on Sunday, June 13th, by the Bank for International Settlements showed that France and Germany have the most to lose if Greece, Ireland, Portugal and Spain are forced to default on some or all of their debt. Between the two, France and Germany own $1.58 trillion of debt. Expect France and Germany to remain as the only two real players in the Euro Zone's debt crisis. For now it appears that the bailout package has indeed given leaders time to work through these debt issues.

The oil leak continues in the gulf. What more can I say. Every talk show on TV and radio is covering this event around the clock. Let us all hope that the well gets capped and the oil clean-up saves the regional environment. In case you were curious, BP and Transocean have each seen their stock prices crushed. Over the past 30 days, BP has lost over 30% in value and Transocean has lost 32%. There continues to be a lot of risk surrounding these two companies.

Looking Ahead

While I was pleased to see the markets have a good week, I remain cautious and defensive at this time.

Both the S&P 500 and DJIA held above important support levels last week-1050 for the S&P 500 and 9800 for the DJIA. Both indexes have moved well above these numbers relieving some of the pressure weighing on stocks. The New York Stock Exchange Bullish Percent (NYSEBP) gained slightly for the week closing at 39.08. Remember that this number is calculated by looking at every stock traded on the New York Stock Exchange and seeing if the stock is in a point and figure buy or sell signal. Adding up all of the stocks in a buy signal and dividing by the total number of stocks gives us the Bullish Percent. Anything above 70 is considered overbought, below 30 is oversold, and in between is considered the normal range for stocks. For now the number is telling me that the risk level for stocks has been reduced significantly from just a month or so ago when the NYSEBP was above 80%.

There have been a couple of sectors that continue to outperform and it is there I am looking for ideas when the green light comes back on for stocks. Real estate, consumer discretionary and technology continue to hold the top sector spots on a relative strength standpoint. Looking at the market in broader terms, emerging markets are showing renewed strength and small and mid-cap stocks remain on top from a relative strength standpoint. Commodities, while strong performers this past week, continue to remain very volatile and should be considered in small doses and only if you have the stomach for such gyrations in a portfolio.

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. 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.

On a final note, this Friday (June 18, 2010) will be the second Quadruple Witching this year and occurs when stock options, index options, index futures, and single stock futures all expire on the same day. Historically the week of Quadruple Witching is accompanied by greater volatility so don't be surprised if the recent volatility is extended into this week.

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.

Sincerely,

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.

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