Wednesday, June 23, 2010

Weekly Market Update - June 20, 2010

The never ending search for some verification, some confirmation that economic growth is here to stay has begun to consume investors much as it seems Ponce de Leon was consumed by his search for the Fountain of Youth. It appears that investors received something of a sign this past weekend in the form of a policy change from Beijing...but I get ahead of myself.

The stock markets had another good week. The DJIA gained nearly 240 points (+2.35%) closing at 10,451. The S&P 500 also gained 2.37% closing at 1118. Both of these major indexes have now posted two 2%+ weeks back to back-the best for 2010. For the year, both the DJIA and S&P 500 are now positive again up 0.22%. Nearly all of the gains of the week occurred on Tuesday with the other four trading days very subdued compared to recent volatility. Not even the Quadruple Witching on Friday stirred much movement in the markets.

The MSCI (EAFE) World gained an impressive 4.15%, but this broad international index continues to trail both major US indexes on an absolute basis. For the year, the MSCI (EAFE) is down 10.22%.

The Euro rebounded for the second week in a row closing at $1.2384 up from last week's close of $1.2116. This rebound comes despite news all during the week in which Spanish banks were seen as under real pressure due to their increasing difficulty in obtaining short-term loans from other banks. EU economic policy makers are dealing with this problem as well as the overall strength of banks from other EU countries. Expect to see more news on this subject in the coming weeks-for now it has returned to a back-burner issue.

Oil has rallied as the dollar weakened against other currencies. By the end of the week oil was back over $75 per barrel. There are no signs that the upward price pressure on oil is abating.

Gold settled on Friday at record levels closing at $1257.20 up $27 (+2.2%) for the week. Uncertainty in the financial markets remains the basis for gold's strength.

Prices of US treasuries gained slightly dropping the 10-year rate down to 3.2250% from 3.2328%. General fears around the world continued to push investors into US treasuries. Corporate bonds continued to provide small, but positive gains for the week.

THE ELUSIVE SEARCH FOR GROWTH

In general, the economic news of the week was not good.

Jobless claims were unexpectedly higher, housing starts and permits tumbled in May, the Philadelphia Fed's general economic index fell to a 10-month low, and Spain's banking problems all signaled slower than desired economic growth. Yet, the markets held on to their early week gains and posted a positive week. As I said last week, the fact that the S&P 500 held at 1050 and the DJIA at 9800 were very good signs. Additionally, the short-term indicators that I follow have turned positive meaning that I will be looking to add selected high-quality equity positions in portfolios. The longer-term indicators are still cautious, but this has been the first time in many weeks that the equity markets have shown some short-term strength.

CHINA ANNOUNCES DECISION TO LET YUAN FLOAT MORE FREELY

The biggest economic news over the past week was this weekend's announcement by China that Beijing was willing to loosen the tight link to the US dollar.

The US and other developed nations have been pressing China to decouple the Yuan from the US dollar. Critics of China's policies have argued that by keeping the Yuan artificially low, China was undermining global trading by undervaluing their exports to the US and other countries and keeping prices of imports artificially high. The Bulls see this as a long-term positive development enabling US manufacturers to be more competitive in the Chinese markets, while the Bears say that this will do little to fix the longer-term nature of the economic problems in the US and other developed countries-most notably high government spending and excessive national debts.

What is most likely to happen will be that basic commodities like oil, gas, and metals will rise in price as China uses a cheaper Yuan to purchase these goods on the open market. Whether a more expensive Yuan translates into greater exports to China remains to be seen. I would also expect prices of some US goods to rise given the amount of products we consume which are manufactured in China.

Finally, the Chinese decision to act on the Yuan issue over this past weekend will have a major impact on the G20 Summit starting this Saturday, June 26th, in Toronto. The Yuan/US dollar issue was expected to be a major topic of the meeting. Now that is off the table and I believe the Chinese deftly moved the agenda away from them and back to the US and EU.

Looking Ahead

The news from China is certainly significant and I would expect to see a positive reaction to the news near-term. As I have stated, the short-term Dorsey Wright & Associate indicators that I follow have also been turning positive over the past few days. Good signs for now. It is yet to be determined if the news from China will be sufficient to push stocks back into an emphasized status on the longer-term indicators. For now the favored asset categories remain Cash and Bonds.

I remain focused on very strong technical stocks and sectors. Small cap and mid cap remain favored on a broad market basis so you can keep exposure there. Emerging markets are showing greater relative strength compared to developed ones. Real estate continues to be a strong sector play within the US as has the oil services sector.

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. Expect some weakness for now as investors move away from US treasuries in favor of more risky assets. I continue to favor US Corporate Intermediate-term bonds and some international bond exposure. I also believe that short-term bonds can be a good alternative to cash.

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. Securities and Advisory Services offered through Commonwealth Financial Network(R), Member FINRA/SIPC, a Registered Investment Adviser.