Wednesday, October 27, 2010

Attention shifted abroad last week as the US and other countries of the G20 met in South Korea to discuss the global economy and attempt to head off potential currency wars. The US dollar reversed 6 weeks of losses against the Euro and other major currencies, and US corporations continue to report good earnings as markets ended the week with modest gains.

For the week, the Dow Jones Industrial Average (DJIA) gained 70 points (+0.63%) remaining firmly above 11,000 closing the week at 11,132.56. The S&P 500 added 7 points (+0.59%) to close Friday at 1183.08. For the year the DJIA is now up 6.8% and the S&P 500 is up 6.1%.

Real Estate, Financials, and Industrials were the best performing broad sectors last week while Materials, Energy, and Utilities brought up the rear. Year-to-date the top three broad economic sectors continue to be Real Estate, Consumer Discretionary, and Industrials while Financials, Health Care, and Utilities have lagged.

The MSCI (EAFE) World Index posted its first losing week in nine falling 0.46%. A strengthening US dollar and international economic policy debates weighed on this broad international index. For the year the MSCI (EAFE) World index is up 2.72%. For the week, the top performing countries that I follow were Mexico, Italy, and Germany while Brazil, Peru, and Poland were the weakest. For the year, Thailand, Indonesia, and Turkey have been the best performers while Italy, France, and Spain have been the worst.

As noted, the Euro snapped its six week winning streak against the US dollar closing at $1.3933 compared to last week's close of $1.3977. A variety of factors contributed to this drop including policy discussions by the G20, rioting in France and ongoing strikes there, and the announcement by British Prime Minister Cameron that he was proposing deep, across the board budget cuts to get the UK federal budget balanced by 2015.

Gold pulled back $44.30 (-3.2%) an ounce closing at $1327.70. The same factors bearing on currencies are primarily responsible for this pull back. Oil gained $0.75 to close at $82.00 per barrel. Analysts attribute the continuing strike in France and a possible late season storm in the Gulf of Mexico as reasons for the slight increase in prices. France will tap strategic reserves of refined products to meet demand as France oil giant Total SA announced that striking workers was forcing closure of five refineries in the country.

US treasuries rebounded modestly as the yield on the 10-year note fell to 2.5624% from the previous Friday's close of 2.567%. The volatile long end of the bond market (10+ years in maturity) gained the most while international bonds of all types were the weakest performers. Bond investors will be watching the next Federal Reserve meeting closely on November 2nd - 3rd where it is expected Chairman Bernanke will announce the initial size of the Fed's bond purchase program (QE2). While Chairman Bernanke has said recently that he supports further quantitative easing, the size and scope of the purchases have been called into question by remarks of several regional Fed directors.

CHINA RAISES INTEREST RATES

China's announcement Tuesday that they were raising interest rates by 0.25% sent global markets tumbling. This move by the Chinese to curb potential domestic inflation worries investors that growth in China will slow thereby hurting all markets. The US dollar rallied on the news and most metal commodities fell. This announcement was significant because China does not raise rates often, and is likely to help strengthen the Yuan as investors are attracted to the higher yields. It also will factor in the negotiations between members of the G20who most believe the Chinese improperly hold their exchange rate down to benefit Chinese exporters. While this may signal a willingness of the Chinese government to become more engaged in the international community's concerns, it is most likely a very self-serving decision (but aren't all such decisions) by China to deal with internal inflation.

WHAT IS GOING ON IN SOUTH KOREA?

I have commented recently on the growing concern that some countries (the US is #1 on the list) are devaluing their currencies to boost the competitiveness of exports abroad. The fear is that more and more countries will attempt to do the same to protect their exporters. Currency wars inevitably hurt global markets and consumers. In an effort to reduce tensions, Treasury Secretary Geithner proposed an indirect way of dealing with currencies by trying to target a broader metric, current account balances. I am not going to go into detail at this point about what current accounts are or the pros and cons of this approach, but it does address the currency problem between the US and China in a less confrontational manner. The effectiveness of this approach remains uncertain as a number of exporting nations, including Germany and Japan, have made it clear they do not support this approach.

Looking Ahead

There are a lot of economic issues swirling around us today. The strength of the US and global economies, the potential for currency wars, the uncertainty surrounding what actions the Fed will take with QE2 and the effectiveness of those actions, and the US mid-term elections to name a few. Whew, that is quite a list.

With this uncertainty as our foundation, what I do know is that the New York Stock Exchange Bullish Percent (NYSEBP) closed Friday at 70.64 up slightly from last week. A reading above 70 indicates that the markets have become "overbought." While this statistic does not say that a correction is certain in the near-term, it does indicate that the chances of a pull back have increased.

International and US equities are preferred among the five major asset classes I follow. Commodities are third, bonds fourth, and currencies last.

All major international indexes are all positive right now with demand clearly in control.

The Dow Jones Corporate Bond Index and the Barclays Aggregate Bond Index both gained last week, albeit slightly. I believe bonds are a solid holding at this time, but I am cautious about new investment in bonds with maturities greater than 10 years. I am focusing on short to intermediate-term bonds.

Small and mid capitalization stocks remain favored over large cap, and equal-weighted indexes favored over capitalization-weighted indexes. Emerging markets remain favored on a relative strength basis, but developed markets have come back strongly in the past two months and are nearing parity.

Risk levels are elevated to a point not seen since early May and I therefore remain guarded in terms of taking new equity positions. By guarded I mean taking new positions incrementally and being very focused on buying only the strongest technically rated investments.

I will not be publishing an Update next week because of upcoming business travel. I will be attending a conference with my broker dealer, Commonwealth Financial Network®, in Phoenix most of the week. I will remain available should you need to speak with me. Please contact me directly on my cell phone or call my assistant, Lisa Berger, if you need any assistance.

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.

Tuesday, October 19, 2010

Ben Bernanke and the Federal Reserve remained the focus of economic news this past week while interest rates on US treasuries moved up sharply. Concerns over the mortgage foreclosure process pushed banking stocks down sharply.

For the week, the Dow Jones Industrial Average (DJIA) gained 56 points (+0.51%) and the S&P 500 added 11 points (+0.95%) continuing recent gains. For the year the DJIA is now up 6.09% and the S&P 500 is up 5.48%.

Information Technology, Consumer Staples, and Energy were the best performing broad sectors last week while Financials, Health Care, and Utilities brought up the rear. For the year, Real Estate, Consumer Discretionary, and Industrials have been the three best sectors while Financials, Health Care, and Utilities have lagged.

The MSCI (EAFE) World Index posted a gain of 1.28% marking it highest weekly close in 2010 and outpacing US indexes yet again. For the year the MSCI (EAFE) is now up 3.19%. Israel, China, and Peru were the strongest countries I follow while India, Japan, and Taiwan lagged. On a broader basis, developed markets again led the way with China continuing to show strength. For the year, Thailand, Peru, and Indonesia have been the best performing countries while Spain, Italy, and France have been the worst.

The Euro continued to gain against the US dollar last week closing at $1.3977 up from the previous Friday's close of $1.3929. However, the momentum of the gains against the dollar slowed even in the face of Fed Chairman Bernanke's speech on Friday where he essentially reaffirmed a policy that will continue to weaken the US dollar albeit a little more slowly than the markets had been anticipating.

Gold continued its historic run gaining another $26.30 an ounce closing at $1372.00. As I have stated recently, these prices reflect the continuing uncertainty about the strength of paper currencies (read inflation) and an underlying lack of confidence in the global economy. Oil closed down $1.41 at $81.25 last week but still above that important $80 per barrel level. Supplies remain high, but the strike in France continues to negatively impact European refining output. There are now 62 crude-laden ships waiting for the port strike in Fos-Lavera to end so they can discharge their cargo.

US treasuries fell broadly as concerns entered into the market that the Fed's Quantitative Easing (QE) has already been priced into the market and that the ongoing easy money policies represented by QE will lead to inflation in the future. The 10-year yield closed at 2.567% up from 2.392% the previous Friday. Just as the previous week's interest rate move down was the largest one week move this year, this week's interest rate gain was a close second in terms of the size of the move. I said last week that the large drop spoke volumes about investors' expectations; this week's near reversal of that move speaks loudly about how uncertain investors have become. Corporate bonds were also hit with most bonds losing a small percentage of their values. Greatest losses among all bonds were found among the longer-term bonds which are more interest rate sensitive than intermediate or short-term bonds.

IT'S THE FED OVER AND OVER AND OVER AGAIN

The dominating economic story for the third week in a row is the Federal Reserve and its focus on stimulating the US economy by increasing the money supply through the purchase of securities through the Fed's Open Market Committee. My previous two Weekly Updates have addressed this subject in detail. This week's news was mostly focused on Fed Chairman Ben Bernanke's speech Friday morning in Boston where he made several key points:

Inflation is too low. He stated that he thought the appropriate core inflation rate should be 2%.

Unemployment is too high and needs to come down.

The Fed will take further steps to stimulate the economy such as holding short-term rates down and adding liquidity to the economy-more quantitative easing.

The equity markets may be hoping for a huge injection of new cash into the economy, but Bernanke did not give this indication. He also expressed concern over the lack of historical empirical evidence regarding the effectiveness of the non-traditional central bank tools he is employing. The bond markets appear to be rethinking the threats of inflation (if the Fed does less QE it could translate into higher rates), and the commodity markets are driven by a weaker dollar and economic fears.

WHAT ELSE IS GOING ON?

The foreclosure mess has hurt the banks and has cast uncertainty about the ability of the housing market to recover sooner rather than later. The issue revolves around technical processing procedures and not about mortgage holders who are current on their loans being forced from their homes. Home foreclosures in September reached a record 102,134. Additionally, foreclosure filings rose three percent to 347,420. This number represents one out of every 371 households in America. The rate of foreclosures should drop as moratoriums take hold. The net result will be slowing down foreclosures for now and extending the mess that the US housing market has become. Banking giants Bank of America and Wells Fargo each lost 9% of their stock value and Citigroup lost nearly 6% last week.

Initial jobless claims gained 13,000 to 462,000. The lack of job creation continues to be a serious issue.

Consumer sentiment as measured by the Thomson Reuters/University of Michigan index of consumer sentiment fell in October to 67.9. This follows a drop in September as well. The historical average of this index when the economy is in a recession is 74.1and 90.4 in expansions. The economy may be expanding, but not at a rate that is making the consumer feel particularly good.

There was good news last week in the form of retail sales which rose 0.6% in September across most retail sectors. Only clothing and department store sales dropped. Because the consumer remains such a significant part of the economy, this was a very good report.

Looking Ahead

I have said many times that I am not a prognosticator. I do not have the ability to predict what financial markets will do, nor can anyone else for that matter. However, I can look at the technical indicators and get a sense of where we are and what that means to you.

The New York Stock Exchange Bullish Percent (NYSEBP) closed Friday at 69.87 and has been improving week after week. A reading of 70 indicates that the markets have become "overbought." While this statistic does not say that a correction is certain in the near-term, it does indicate that the chances of a pull back have increased. The NYSEBP peaked on April 26th at 80.69 and fell back to 37.6 by June 8th. What this tells me is that there is more risk in the market, not less; and new equity positions should be carefully considered before entering.

All major international indexes are all positive right now with demand clearly in control.

The Dow Jones Corporate Bond Index has pulled back slightly but remains positive while the Barclays Aggregate Bond Index, with its heavy weighting in US treasuries, has turned negative. I am not suggesting reducing current bond holdings, but I am watching this trend closely.

The Dorsey Wright & Associates Dynamic Asset Level Indicators have International and US Equities favored. Commodities recent positive move has pushed Bonds to fourth and Currencies remain last. Small and mid capitalization stocks are favored over large cap, and equal-weighted indexes favored over capitalization-weighted indexes. Emerging markets remain favored on a relative strength basis, but developed markets have come back strongly in the past two months.

The markets have the feeling that they may be reaching an inflection point. The technical indicators that I follow are signaling higher risk levels. If or when they turn is unclear; however, positions must be watched closely. Earnings season will begin in earnest this week and investors will be listening closely to corporate earnings and, more importantly, corporate outlooks as the overall economy continues to be very sluggish. The mid-term elections are just a few weeks away and investors may begin to anticipate a more business-friendly Congress emerging.

If you have any questions about the overall relative strength of your portfolio and would like my analysis, please do not hesitate to give me a call.

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.

Monday, October 11, 2010

A poor jobs report on Friday increased expectations of Federal Reserve intervention spurring a rise in commodity prices as the US dollar continued to weaken. The Dow Jones Industrial Average (DJIA) closed above 11,000 for the first time since the end of April.

For the week, the DJIA gained 177 points (+1.63%) and the S&P 500 added 19 points (+1.65%) to extend recent gains. For the year the DJIA is now up 5.55% and the S&P 500 is up 4.49%.

Materials, Industrials and Energy were the best performing broad sectors last week while Telecom, Utilities, and Health Care brought up the rear. For the year, Real Estate, Consumer Discretionary, and Industrials have been the three best sectors while Health Care, Information Technology, and Energy have lagged.

The MSCI (EAFE) World Index posted a weekly gain of 2.73% outpacing US indexes and is now down just 0.82% for the year. Turkey, Peru, and Spain were the strongest countries I follow while Chile, Thailand, and Indonesia took a breather and lagged. On a broader basis, Developed Markets led the way with China and Japan showing renewed strength. Ireland made headlines towards the end of the week when Fitch Ratings and Moody's Investors Service both downgraded the country's sovereign debt one notch, but Ireland's markets shrugged off the news and were up along with most European countries for the week.

The Euro's surge against the US dollar continued last week closing at $1.3929 up from the previous Friday's close of $1.3790. This move brings the Euro to levels not seen since late January. The dollar is falling against most other currencies as well and this trend is generally responsible for the recent increases of commodity prices.

Gold gained another $33.30 an ounce closing at $1345.50. These record high prices have launched debates about whether gold is now at "bubble" levels or supported by market fundamentals. Likewise, oil also climbed and remains above the $80 level closing at $82.66 up $1.08 from its October 1st close. Oil pulled back slightly Friday on news of an extended port workers strike in France cutting off most crude delivers in that region. The expectation is that record high seasonal inventories in refined products will draw down as a result.

US treasuries rallied again after the jobs report with the 10-year yield closing at 2.392% well below last week's close of 2.625%. This was the largest weekly move on a percentage basis in 2010 and speaks volumes about investors' expectations.

RAMIFICATIONS OF HIGH US UNEMPLOYMENT

Friday's jobs report sent the bond market surging with expectations that the Fed is likely to renew Quantitative Easing (QE) in November. I have addressed QE in recent Weekly Updates, but I believe the importance of this topic warrants another review. QE is implemented by the Federal Reserve purchasing securities (i.e. US Treasuries) on the open market for the purpose of injecting liquidity (cash) into the economy. This new cash (the Fed prints the dollars they use for QE) flows into the economy and is eventually expected to result in positive outcomes such as renewed lending by banks and strong economic activity. Cash is the gasoline that runs the economic engine and QE is an octane boost.

The impact of this new wave (or anticipated wave) of QE generated cash into the economy ripples throughout the US and global economies resulting in:

Falling interest rates: we saw on Friday the 10-year US Treasury yields fall dramatically simply in anticipation. The 2-and 5-year yields are at record lows.

Falling US dollar: Global investors seek higher interest rates elsewhere so US dollars are sold to buy the currencies of the other countries that investors are buying bonds in.

Increasing US exports: or so the theory goes. As the US dollar weakens, US goods become cheaper abroad giving American products a price advantage. This increases economic activity here in the US.

Increasing likelihood of "currency wars:" Other countries wishing to protect their own markets and manufacturers may also attempt to push the value of their currencies down. Japan, Brazil and South Korea have all taken measures recently to do just this.

Increasing commodity prices: the vast majority of commodity contracts around the world are priced in dollars. Foreign commodity buyers must exchange their currencies for US dollars effectively lowering the cost to those buyers. Americans in turn see higher commodity prices as lower prices abroad spur greater demand.

Raises expectations of future inflation.

Excess US dollars can find their way into equity markets causing stock prices to rise.

If this sounds like the world is getting extremely interdependent, it is. Countries all act in their self-interest and when things get out of balance as may be happening; this can put significant pressure on all economies.

Treasury Secretary Timothy Geitner spoke on Saturday (October 9th) to an International Monetary Fund (IMF) gathering of world economic leaders arguing that some currencies are significantly undervaluedtranslate this to mean, "China, you need to let the Yuan appreciate to make US goods in China cheaper." The Chinese have historically resisted calls of action by the United States, and this time is no different. Also, because the Chinese peg their currency to the US dollar, their goods remain competitively priced all over the globe. Expect a lot of discussion ahead on the role of the IMF in negotiating currency disputes between countries.

Looking Ahead

There is a lot going on right now. Earnings season has just gotten underway, the US economy continues to struggle, jobs are not being created, US banks are suspending foreclosures assuring the housing recovery will be even longer and more painful, and the mid-term elections are looming just a few weeks away.

Equity markets around the world continue to rise.

This is when relative strength analysis helps bring clarity to the barrage of seemingly unrelated economic data hitting investors.

Based upon current analysis I continue increasing my exposure to equity markets. Broadly speaking, US and international equities are preferred; however, commodities are making a strong showing recently and I will be looking to add more commodities to portfolios. Small and mid-capitalization stocks are preferred over large cap, equal-weighted indexes are preferred over capitalization-weighted indexes, and I continue to favor Real Estate, Consumer Discretionary, and Telecom among broad economic sectors. Recently, the Materials and Industrials sectors have shown excellent relative strength and are worth watching.

My guidance on international markets remains unchanged. Emerging Markets are preferred over developed ones; however, the relative strength advantage of emerging markets is narrowing making most international investments good for now.

The weak US dollar has certainly caused commodities to increase. Gold is holding strong at record levels and remains firmly positive on a relative strength basis. I would be cautious about entering into new positions here, but would retain existing positions. There may be an opportunity to purchase gold on a pull back. Oil and oil service stocks are showing strong technical moves and are attractive.

Bonds continue to rally and are very expensive right now. Looking at my broad asset categories, bonds have fallen below commodities and rank only above currencies at the present time. However, many bonds continue to provide a solid investment in portfolios and I am not looking to reduce positions for now. Investment grade corporates, preferred, emerging markets, high-yield, and intermediate-term treasuries have the best relative strength in my opinion.

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.

Monday, October 4, 2010

Stock markets at home and abroad cooled last week, but September 2010 will go down as the best September since 1939.

For the week the Dow Jones Industrial Average (DJIA) lost 31 points (-0.28%) and the S&P 500 lost 2 points (-0.21%) marking the first down week after four consecutive weeks of gains. For the month of September the DJIA gained 7.62% and the S&P 500 gained 8.63%. As of market close on Friday, the DJIA is up 3.45% for the year and the S&P 500 is up 2.34%.

Energy, Telecom, and Utilities were the best performing broad sectors while Technology, Real Estate, and Financials lagged. Real Estate, Consumer Discretionary, and Telecom have the strongest technical scores indicating greater relative strength over the past six months or so, while Financials, Health Care, and Energy continue to be at the bottom. Smalland Mid-capitalization stocks continue to outperform large cap stocks, and the equal-weighted S&P 500 index outperformed the capitalizationweighted index.

The MSCI (EAFE) World Index posted a modest gain of 0.20% last week and for the month of September gained a strong 9.33%. For the year, this broad international index is down just 0.82%. This past week saw Brazil take the top spot for the countries I follow for the first time in quite a while, followed by Thailand and Turkey. Spain was the worst performer along with Switzerland and France. Spain's troubles were primarily a result of a credit rating cut by Moody's Investment Services on Thursday. Don't take your eye off the European sovereign debt situation.

The big story of the week has been the surge in commodities. I believe this is primarily attributable to the renewed strength of the Euro and the general weakness of the US dollar. Friday's Euro close of $1.3790 was nearly a 3 cent gain from last Friday's closing Friday of $1.3491. This marks an 8.28% gain since the last Friday in August and puts the Euro within 5.25 cents of its 2009 closing of $1.4316. This is a continuation of the narrative from last week's update where I discussed the impact of the Fed's possible return to "quantitative easing."

Gold continued to climb closing the week at $1318.80 and oil broke through $80 to close at $81.58. A weaker US dollar makes commodities cheaper to non-US dollar buyers. Nearly all commodity contracts are conducted in US dollars and international buyers must convert their currencies into US dollars when they buy. When the US dollar is weak, the effective cost to non-US buyers falls. Basic economics says that demand will rise when goods become less expensive and this is certainly happening to most commodity prices right now. Good manufacturing data out of China also helped spur demand for all commodities.

US Treasuries pulled back slightly this week with the 10-year yield closing up to 2.6250% from last week's close of 2.6070%.

THE DOLLAR IS FALLING

Countries devalue their currencies for very selfish reasons. Principally they want to drive internal economic growth through exports and a cheap currency helps do that. Members of the Federal Reserve spoke all during the week discussing the pros and cons (mostly pros) of the Fed taking renewed action to help jump-start the economy through the purchase of US Treasuries. There are many long-term political and economic problems with this cheap dollar strategy which I simply cannot summarize in a short update, but economic historians look at the Great Depression in the '30's and Japan in the "80's and '90's for examples of the long-term economic harm that can come from this type of policy.

However, the stock market likes this kind of support today. Dollars sloshing through the US economy find their way into the stock market (anyone remember what happened in 1999 as the Fed significantly increased the supply of money in anticipation of Y2K) and stock valuations inevitably rise. The great September in markets here and abroad came at a time when economic data has failed to show any appreciable recovery. Whenever I read a headline today the economic news is still bad, just not as bad as it has been. The economy is expanding but at an ever slowing rate. Most economists now believe the likelihood of deflation or the US going into a second recession is remote and certainly factored into September's gains. However, part of the reason the US markets were down last week was attributable to the reality that economic data just isn't good. So the tug-of-war continues and I anticipate these markets will continue to be sensitive to releases of economic data.

Looking Ahead

The most significant economic data point to be released next week is Friday's unemployment report. Consensus is anticipating the unemployment rate to remain around 9.6%. The real focus will be on private sector job creation. I do not expect a great number, but as I have sad, numbers do not have to be great these days to get a strong move in the market.

We are now down to the last four weeks before the mid-term elections. The markets are likely to rally on the election of more "business friendly" legislators. I will follow this and other developments closely.

US equities and International equities are my preferred asset classes at this time. The greatest strength remains in the small and mid-capitalization stocks. Expect commodities to continue to show strength if the US dollar continues to fall against the Euro and other currencies. Emerging markets remained favored over developed ones especially in Asia and Latin America.

International bonds, particularly those from emerging market regions have shown recent strength. US bonds continue to hold their own and have proven to be a solid investment this year. I believe yields are what they are and will remain steady for the foreseeable future.

Gold is at record highs and will continue to trade at these levels for now.

On a different note, I want to draw your attention to a story in the Wall Street Journal on October 2nd regarding the break-up of an international computer-crime ring that is accused of stealing $70 million primarily from businesses and municipal governments. While individuals were not the primary target this time, I want to remind each of you to review your statements closely each week. I have encountered friends and clients who have been affected by these types of criminals who took small amounts (under $50) from their accounts. Please pay attention to the details of your statements.

If you have any questions about the overall relative strength of your portfolio and would like my analysis, please do not hesitate to give me a call.

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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