Tuesday, February 22, 2011

The Weekly Update is back after a one week break as I successfully fought off a serious sinus infection. My wife, Virginia, reminded me that I did not get a flu shot this year against her advice, and I admit that I have paid the price for being a "typical guy."

Financial news has taken a back seat recently to the political news coming in from the Middle East and here in the United States. The Egyptian protests have garnered nearly 24/7 coverage on the cable news networks as we watched the unrest continue and now spread throughout the broader Middle East. Oil is the blood of international commerce, and most of it is produced in the Middle East making what happens there critical to our economic health. Here in the United States the political protesting occurring in Wisconsin is bringing the battle over fiscal philosophies to a boiling point. I fully expect this type of discourse to spread to other states over the year, and this does not even begin to speak to the battles beginning to take shape in the US Congress over our federal budget deficits. Looking at these major stories, I believe that if the Middle East devolves into chaos and disrupts the flow of oil, this will have a significant impact on markets. As our internal debates rage here, I would not expect major impacts on our markets in the near-term. If budget deficits continue to grow at current rates, however, the economy will begin to suffer and the first signal of this will likely come from a significant rise in interest rates.

The markets have continued their very steady increases here in the US. Seven weeks into the trading year, the Dow Jones Industrial Average (DJIA) has been up six of the weeks, and the S&P 500 has been up five of the seven. Last week, the DJIA added 118 points (+0.96%) and the S&P 500 added 14 points (+1.04%). The Russell 2000 was the best performer of the big three adding 12 points (+1.47%). For the year the DJIA is up 7.03%, the S&P 500 is up 6.79%, and the Russell 2000 is up 6.45%.

The top three broad economic sectors last week were Energy, Health Care and Materials while Telecom, Consumer Staples, and Utilities were the bottom three. For the year, Energy is now up double digits followed by Industrials, and Information Technology. Every sector is positive for the year.

The MSCI (EAFE) World Index gained 2.04% for the week and is now up 6.07% for the year. International performance has been disparate and uneven so far in 2011. Spain, Italy, and France are the top three countries that I follow posting double digit gains. Recall that last year these countries were significant underperformers due to the uncertainties surrounding the European debt crisis. At the bottom of my list of countries are Egypt, India, Chile, and South Africa, all countries that had performed exceptionally well or above the broader indexes last year. In general, Developed Markets have out-performed Emerging Markets, and the Middle East appears to remain under greater stress than most other areas of the world.

There has been some news coming in late last week regarding Portugal's debt situation. The interest rates on their 5 and 10-year government bonds have pushed above 7%. This is considered an unsustainable level and prompting calls for the Portuguese to accept a bailout from the European Union (EU). The EU will spend the next month or so trying to formalize the terms of the permanent bailout fund. The sticking points center on just how much power the EU will be given over individual member countries that do not adhere to the rules. The European debt crisis ebbs and flows and it must be watched carefully.

Chinese markets are slightly positive this year, but news on Friday that the Peoples Bank of China is increasing the banking reserve requirement for the second time this year (6 times in 2010), to 20% will certainly impact Chinese markets when they open on Monday. Additionally, just gaining coverage by the media is growing unrest as Chinese activists seek to piggy-back off the unrest in the Middle East. So far, Chinese authorities have aggressively moved to squelch the "Jasmine Revolution."

The Euro gained just over 1% against the US dollar last week closing Friday at $1.3698 up from the previous week's close of $1.3540. The Euro has remained relatively stable against the dollar so far in 2011 posting a 2.5% increase for the year. Most of this gain in the Euro (and other currencies) against the US dollar reflect the view that long-term interest rates of US Treasuries will remain below those of other countries. A broader index, the NYCE U.S. Dollar Index (DX/Y), has also fallen about 1.8% for the year (the higher the index, the stronger the US dollar). Federal Reserve Chairman Ben Bernanke defended his quantitative easing policy in a speech last Friday in Paris to the finance leaders of the G-20 (top 20 world economies), reinforcing the belief by investors that the Federal Reserve will continue to keep interest rates as low as possible for the foreseeable future.

Gold posted its largest increase so far this year gaining $28.20 (2.07%) as gold closed Friday at $1388.10 per ounce. After being down over 6% earlier in 2011, gold is now down 2.23% for the year. Oil (WTI) added $0.42 (+0.49%) to close the week at $86.00. For the year, however, oil remains off 5.72% even as the energy sector in general continues to rally. A broader look at commodities shows they remain in a general up trend, but trailing the broader US stock indexes. I will reiterate my belief that all commodity prices will be impacted should political unrest spread and impact global commodity producers.

Bonds rallied last week with the Barclays Aggregate Bond Index gaining 0.46% and is now down 0.5% for the year. The 10-year Treasury yield closed Friday at 3.5850% down from the previous week's close of 3.6380%. For the year, high yield and preferred bonds have been the best performers while long-term Treasuries and corporates have been the worst performers.

THE NEW YORK STOCK EXCHANGE BULLISH PERCENT (NYSEBP)

The NYSEBP is my most important general barometer of the market's "mood." By mood I mean is the market generally supporting higher prices or lower prices? I discussed the general tenants of the NYSEBP in my Weekly Update of January 23, 2011, but I want to add to that discussion.

As of Friday, the NYSEBP reading is 80.29. Moving over 80 is a very significant event as this marks only the fourth time a reading this high has occurred in the past 10 years. This means that the markets are considered extremely overbought and demand for stocks is clearly in control.

All of economics is based upon the concept of SUPPLY and DEMAND. In other words, when people in general want (demand) more of something than is available, prices will rise; and when people do not desire (supply) something, prices will fall. To see this concept at work today I have to look no further than the Elton John concert in Norfolk, Virginia, this coming March. Tickets were clearly in demand as all available supply was sold within 90 minutes after they went on sale. Since then, a variety of ticket brokers have listed a limited number of tickets for sale at prices as much as 100 times face value. Demand is clearly in control of these tickets.

The NYSEBP measures the intensity of this demand (or supply) across a very broad spectrum of stocks, and as the NYSEBP rises above 80, demand is strongly in control. The question everyone wants to know is how long this intensity will remain, but unfortunately there is no way to answer that question. In the previous three times over the past 10 years that the NYSEBP has risen above 80 and reversed down (supply in control), the average time from peak to reversal has been 39 days (10, 41, and 67 days). The current NYSEBP peak occurred on January 18th at 80.33, but until the NYSEBP reverses, it will not be possible to determine if that peak will in fact be the peak for this current period. It will take a move of the NYSEBP down to 74.32 before a reversal will occur with the current peak. As of today, February 20th, it has been 33 days since the NYSEBP peaked. If you take nothing else away from this discussion, recognize that the level of risk is high in this market and entry positions of new equity securities should be taken with careful consideration.

Looking Ahead

For now it appears that the political news both here and abroad will continue to dominate the headlines. I will be watching to see how the news of China's tightening and political unrest in the Middle East will impact the markets this coming week.

Small and mid-capitalization stocks continue to perform strongly and the Russell 2000 is closing in on the DJIA's performance this year. I continue to recommend small and mid capitalization stocks. I prefer equal weighted indexes over capitalization weighted indexes. I continue to like the Consumer Discretionary, Materials, Energy, Real Estate, and Technology sectors.

The international sector is performing admirably. Developed and Emerging Markets both exceeded the US markets last week and are carrying some near-term momentum. I believe that the risk here is high right now given the unrest developing abroad.

Most bonds are showing steady performance. I continue to believe that bonds will perform like bonds, not like equities as they have over the past two years. I am avoiding any longer-dated maturities and focusing on intermediate-term corporates and high-income, floating rates, and preferred bonds.

Commodities are volatile. I continue to believe that oil prices are clearly sensitive to the uncertainty in the Middle East and any threats to supplies in any of the oil producing countries can cause a sharp increase in prices. A falling US dollar will also contribute to an increase in commodity prices in general. Gold is trying to get even for the year. I believe that if you own gold, keep it. Gold remains a hedge against the global uncertainties. I see no reason at this time to sell any commodities in portfolios.

The NYCE US Dollar Index is a measure that calculates the value of the US dollar through a basket of six currencies, the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona, and the Swiss franc. The Euro is the predominant currency making up about 57% of the basket.

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.

Emerging market investments involve higher risks than investments from developed countries and also involve increased risks due to differences in accounting methods, foreign taxation, political instability, and currency fluctuation. The main risks of international investing are currency fluctuations, differences in accounting methods, foreign taxation, economic, political or financial instability, and lack of timely or reliable information or unfavorable political or legal developments.

The commodities industries can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. Past performance is no guarantee of future results. These investments may not be suitable for all investors, and there is no guarantee that any investment will be able to sell for a profit in the future.

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, this is a market capitalization weighted index, meaning the largest companies in the S&P 500 have a greater weighting than smaller companies. The S&P 500 Equal Weighted Index is determined by giving each of the 500 stocks in the index the same weighting in the index. 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. The Russell 2000 Index is comprised of the 2000 smallest companies within the Russell 3000 Index, which is made up of the 3000 biggest companies in the US.

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

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Wednesday, February 9, 2011

The world watched events unfolding in Egypt closely last week and also digested a series of relatively good US economic reports moving equity markets upward around the world.

The Dow Jones Industrial Average (DJIA) gained 268 points (+2.27%) to close at 12,092. The S&P 500 added 35 points (+2.71%) to close at 1311, and the Russell 2000 added 25 points (+3.19%). For the year is up DJIA 4.45%, the S&P 500 is up 4.23%, and the Russell 2000 is up 2.10%.

Investors absorbed a swirl of conflicting news last week as positive US economic data was reported as scenes of chaos and rioting in Egypt shown around the clock on every news channel. The US unemployment rate dropped unexpectedly in January from 9.4% to 9.0%on a gain of just 36,000 net new jobs. Economists had been predicting the joblessness rate to increase by 0.1%. The extreme weather conditions throughout much of the US raised questions about validity of the data and certainly hurt the construction and transportation sectors. Positives taken from the report were a growth in manufacturing and private sector jobs, while the negatives include less than robust growth and an overall worker participation rate of the US population 16 and older at its lowest level since 1984 at 64.2%. Another data point out last week came from the Institute for Supply Management which showed the US services industry (90% of the economy) grew at the greatest rate since 2005. So the consensus of opinions remain that the US economy is growing, and will continue to grow, even though that rate of growth is not as robust as many would like to see.

The top three broad economic sectors last week were Energy, Materials, and Information Technology while Utilities, Real Estate, and Consumer Staples were the bottom three performers. For the year, Energy, Information Technology, and Industrials are the best performing sectors and Consumer Staples, Telecom, and Consumer Discretionary are the bottom three.

The MSCI (EAFE) World Index gained 1.69% for the week and is now up 3.93% for the year. Developed markets outperformed emerging markets and continued to widen that gap for 2011. On a sharp reversal from the previous week, Egyptian stocks posted the largest single country gain (trading on international markets) as investors appear to be gaining optimism (or are simply placing speculative bets) that the transition from Mubarak to anyone else, will go smoothly. According to Bloomberg, the Egyptian stock exchange will remain closed until at least February 8th, although banks opened for abbreviated hours on Sunday, February 6th. Turkey and Australia were the other top performers last week. The bottom three performers of the countries I follow were India, Brazil, and China. For the year, Spain, Italy, and France are the top performers while India, Egypt and Chile are the worst. Investors are growing concerned about the onset of strong inflation in emerging markets which is a major factor contributing to under-performance. These concerns were articulated by the International Monetary Fund's First Deputy Managing Director who said in an interview Friday with the Dow Jones Newswires that countries are running out of excess capacity while holding in place "expansionary, accommodative monetary and budgetary policies."

The Euro fell slightly closing the week at $1.3576 from last week's close of $1.3609. This drop was attributed to a variety of factors including the European Central Bank (ECB) President's comments that inflation in Europe was not a major concern for now and that rising prices were mostly in the energy and commodity areas leaving investors to conclude that the ECB will not raise interest rates in the near future. Additionally, some rather public disagreements emerged over policies proposed by Germany (and supported by France) to force weaker European Union (EU) countries to tighten their fiscal and monetary policies. The Germans proposed raising retirement ages, abolishing wage-to-inflation indexing (automatic cost of living adjustments), setting more uniform corporate tax rates, and installing some kind of controls over how much new borrowing a country can undertake. In other words, the Germans want to strengthen the role of the EU at the expense of individual country rights. This debate is far from over in Europe.

Commodities were flat to mostly higher last week. Gold rebounded slightly adding $6.60 per ounce (0.49%) to close at $1348.30. Gold is being pushed and pulled by investor concerns over the turmoil in Egypt while eying positive economic news from the United States. Oil prices dropped $0.31 (-0.35%) and closed the week at $89.03. Like most other asset class movements last week, belief that Egypt was not perilously close to collapsing and the Suez Canal and pipeline were not immediately threatened, contributed to oil's pullback. Additionally, the strengthening US dollar also helped stem price increases.

Bonds had their worst week of 2011 with the Barclays Aggregate Bond Index falling 1.25% pushing the broad bond index down 0.95% for the year. The 10-year Treasury yield increased to 3.6397% from the previous Friday's close of 3.229% following a series of positive economic reports. As investors gain confidence in the equity markets, bond positions are trimmed to raise cash to buy stocks pushing prices down and yields up. The high yield and floating rate sectors of the bond market were the best performers while long-term government bonds were the worst.

FOLLOW-UP ON THE JANUARY EFFECT

A couple of weeks ago I discussed the "January Effect" and I wanted to follow that up with some more analysis now that January has concluded. I attribute this analysis to my friends at Dorsey Wright & Associates in Richmond, Virginia.

The old market adage warns, "as January goes, so goes the year;" the idea of course being that if the first month of the year records a gain, the year will follow suit on a positive note. This is exactly how we are moving forward into 2011 since last month we witnessed the S&P 500 gain 2.26%. Conversely, if January begins the year in the trenches, the adage implies the overall year will leave investors loss stricken. There is research to support this historical bias, and using data going back to 1950 (as published by Stock Trader's Almanac), this barometer has roughly a 74% accuracy rate, and a 90% success rate of simply avoiding significant mistakes (the market moving 5%, or more, in the wrong direction). Since 1950 there have only been 7 years where the S&P 500 moved more than 5% in the opposite direction than how the month of January closed. Interestingly, 4 of those 7 years where the barometer has been "broken," came within the past decade! In 2001 the market offered a quick rally of 3.5% in January before nose-diving to post the sixth worst year on record since 1950 -- down 13%. Contrasting that move was 2003, when the S&P 500 closed January in negative territory leading up to the beginning of the 2nd Gulf War, but as we know ended the year up 26.4%. In 2008 the Barometer was right on target, as January was a down month (-6.1% for SPX) and the rest of the year was abominable, posting a loss of -38.5% for 2008. In January 2009, we started the year much like 2008 ended, with a loss of -8.6%. But after a March bottom, the market got back on solid footing and ended the year with huge gains of +23.5%. Now, that is the kind of error you like to see! The most recent "error" in the Barometer was just last year in 2010 when we entered the year with a -3.70% loss in the S&P 500, yet the rest of the year was quite positive as the market scratched back from the Summer doldrums and ended 2010 up 12.78%.

A point that bears repeating (that was displayed in the last two years) is that the "January Barometer" is notably better at predicting strong years than it is at predicting losers. Of the 24 red Januaries since 1950 the market has followed up with down years 54% of the time (13 occurrences), with only 4 double-digit rallies following a bad month of January (2010 and 2009 being the most recent). These historical tendencies are just that, tendencies, and can obviously be wrong and shouldn't serve as a primary indicator for anyone looking to tactically manage market risk. For this we turn to our market barometers and tactical allocation tools, which currently present a bullish outlook or guidance with regard to the equity markets, yet with a higher risk backdrop. Equities are currently a favored asset class (along with International Equities), and the NYSE Bullish Percent (NYSEBP) is in offense (>70), albeit in overbought territory.

Looking Ahead

The markets have posted nice gains so far in 2011; however, I believe that risk levels remain elevated. The NYSEBP closed the week at 78.96 up from last week's close at 78.30 well above the overbought level of 70 held since October 2010. Events unfolding in the Middle East will likely to continue impacting stock markets next week-good or bad.

Small and mid-capitalization stocks rallied strongly last week and closed the gap on large cap stocks, and they remain favored on a relative strength basis. I like the technology, energy, and basic materials sectors. Basic materials include metals, timber, and chemical companies.

Emerging markets rallied as well; however, they continue to under-perform developed markets. The major emerging market countries including India, Brazil, and China are all under-performing so far in 2011 as inflation continues to weigh on markets and investors expect economic tightening measures to continue or be put in place. I believe close scrutiny of emerging market holdings is warranted, but not outright selling of all positions.

Bonds had a tough week and investors should remain vigilant. Long-term treasuries and corporate bonds are clearly under the greatest stress. There are many different flavors in bonds and you should understand what types of bonds you have and adjust accordingly. I am still comfortable with the intermediate corporate bond category, but I believe that high yield and floating rate bonds should be considered as part of an overall bond portfolio at this time.

I believe that commodities will remain volatile. Oil prices are clearly sensitive to the uncertainty in the Middle East, but also to the strengthening of the US dollar. Gold strengthened last week and I still like it as a hedge against the uncertainty in the world. I will watch the price closely to see how it reacts to this week's events. The agriculture commodities have continued to rally and move higher.

The less sensitive indicators found in the Dynamic Asset Level Indicators (DALI) still show US and International stocks to be favored, Emerging Markets favored over Developed, equal-weighted indexes favored over capitalization-weighted, mid and small cap over large cap, and growth over value. Because the DALI is less sensitive than the markets in general, changes, when they occur, are significant.

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.

Emerging market investments involve higher risks than investments from developed countries and also involve increased risks due to differences in accounting methods, foreign taxation, political instability, and currency fluctuation. The main risks of international investing are currency fluctuations, differences in accounting methods, foreign taxation, economic, political or financial instability, and lack of timely or reliable information or unfavorable political or legal developments.

The commodities industries can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. Past performance is no guarantee of future results. These investments may not be suitable for all investors, and there is no guarantee that any investment will be able to sell for a profit in the future.

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. The Russell 2000 Index is comprised of the 2000 smallest companies within the Russell 3000 Index, which is made up of the 3000 biggest companies in the US.

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

Wednesday, February 2, 2011

The news coming out of the Middle East late Thursday and Friday sent shock waves through the financial markets sending investors seeking the safety of the US dollar, gold, and US Treasuries. The Dow Jones Industrial Average (DJIA) lost 166 points (-1.39%) on Friday, the largest drop since November 16, 2010, pushing the DJIA down 48 points (-0.41%) for the week closing at 11,824. The S&P 500 lost 23 points (-1.79%) as well on Friday posting its largest one day loss since August 11, 2010. For the week the S&P 500 lost 7 points (-0.55%) to close at 1276. The Russell 2000 posted a loss of 2.52% on Friday, but managed a gain of 0.3% for the week. For the month and year, the DJIA is now up 2.13%, the S&P 500 is up 1.49%, and the Russell 2000 is down 1.05%.

The top three broad economic sectors last week were Real Estate, Energy, and Materials while Consumer Staples, Consumer Discretionary, and Health Care were the bottom three performers. For the year, Energy, Information Technology, and Industrials are the best performing sectors and Materials, Telecom, and Real Estate are the bottom three.

The MSCI (EAFE) World Index lost 1.21% on Friday but posted a gain of 0.37% for the week and is now up 2.2% for the year. Of the countries I follow, Egypt leads all decliners for the week and month. Last year's hot countries such as Chile, Indonesia, Turkey, India, and South Africa are all off double digits so far in 2011. Developed Europe still holds the top positions for the year as the debt crisis continues to be managed to investors' satisfaction. I continue to believe that this issue demands careful scrutiny given the complexity and uncertainty of the many issues facing Europe. The Euro closed down slightly against the US dollar for the week closing at $1.3609 compared to the previous week's close of $1.3615 as concerns over the political uncertainty of Egypt and the Middle East impacts the world's financial markets. For the year, the Euro is still up 1.8% against the US dollar. Emerging markets, with heavy exposure to the Far East and Latin America, continue to struggle this year as these regions fight local inflation and exposure to commodity prices. Emerging markets continue to hold the relative strength advantage over developed markets; however, this relationship has closed dramatically since the start of the year.

Commodities were mostly higher last week. Gold stopped its dramatic fall on Friday gaining 1.7% on Friday to close the week at $1341.70 adding $0.70 from last week's close of $1341.00. Friday's jump in gold continues to reinforce my belief that the metal is protection against uncertainty in the world's markets. For the year, gold is down 5.5%. Oil also surged 4.3% on Friday finishing the week at $89.34 per barrel (WTI) up $0.23 from the previous week's close. All of this action followed the same theme of the day and week as investors worry about the ramifications of the political unrest in Egypt. Oil investors have the added concerns over the access to the Suez Canal and a pipeline that together move over 2 million barrels of oil daily. Oil is now down just over 2% for 2011.

Bonds were the recipient last week of investors' move to safety. The Barclays Aggregate Bond Index gained 0.42% for the week and is now up 3 of the first 4 weeks of 2011. For the year the Barclays Aggregate Bond Index is up 0.30%. The 10-year treasury yield fell for the week closing Friday at 3.3229% from the previous week's close of 3.4081%. The news all week was negative for bonds including Standard & Poors downgrading Japan's credit rating from AA to AA-. This followed a report from Moody's Investor Services on Thursday saying that if there is no action to cut the growing US federal deficit that "the probability of assigning a negative outlook in the coming two years is rising." Additionally, Wednesday's announcement of the US 4th Quarter, 2010, Gross Domestic Product (GDP) of 3.2% also pushed bond prices lower. The jobs report showing first time unemployment claims jumped unexpectedly reinforced the likelihood that the Federal Reserve will complete all $600 billion of Treasury purchases which also helped hold down yields.

UNCERTAINTY EMERGING FROM EGYPT

We are all reminded of the political uncertainty in many parts of the world as we watched, and continue to watch, riots in Egyptian streets challenging the 30-year reign of Hosni Mubarak. Besides the stability that Mubarak has brought to the Middle East, the country controls the Suez Canal and a major oil pipeline. As I mentioned earlier, over 2 million barrels of crude oil (2% of daily global production) move through these facilities. Any disruption of these flows could have a significant impact on energy prices around the world. Additionally, Egypt is a major producer and exporter of cotton. Cotton is already at record high levels and any disruptions will add to these record prices.

The Wall Street Journal is already reporting that Egyptian banks and markets will be closed tomorrow (Monday, January 31st) adding further stress to the markets. There is no indication when these markets will reopen.

US ECONOMIC NEWS

I mentioned briefly that the 4th Quarter, 2010, GDP numbers were announced last week showing the quarter grew at 3.2% disappointing investors who were expecting a number closer to 3.5%. The GDP has grown each quarter (1.7% in 2nd Quarter, 2.6% in 3rd Quarter) of the last three in 2010, but the rate of growth is significantly below rates coming out of previous recessions. Additionally, most of the growth was attributed to increased consumer spending and there is doubt about how long the US consumer can continue to carry the economy. Other parts of the economy were either flat or down. The DJIA temporarily jumped over 12,000 on Wednesday morning, but could not hold that level after traders had time to fully digest the GDP numbers. Additionally, the Department of Labor (DoL) announced that first time unemployment claims jumped the previous week to 454,000 when a number closer to 405,000 was expected. Some of the increase was attributed to the bad weather in the eastern United States both in terms of the economy and data reporting. Without a doubt, the economy is not producing jobs at a level necessary to reduce unemployment below 9%. The January unemployment number will be released this Friday (February 4th) and if the rate remains above 9% as expected, this will mark the 21st consecutive month above 9% and will be the longest such streak since this statistic has been reported beginning in 1948. Finally, housing sales jumped 17.5% month-over-month providing talking heads on TV lots to get excited about; however, when this number is examined closely, most of the growth was due to the coming expiration of a California tax break similar to the one the federal government had earlier.

I agree with some of the pundits who say that the real challenge in US economic growth will come in the 2nd and 3rd Quarters of 2011 when the massive government stimulus (Quantitative Easing 2) expires. If the GDP numbers can continue to show growth, I will become much more confident that the economy is actually improving on its own.

Looking Ahead

Egypt will be the major story this week. The question will be how quickly this crisis is resolved and to what outcome. What is certain is that markets will likely be volatile until then.

I have stated that the markets are oversold and have been for some time. We have seen small and mid capitalization companies pull back more this year than the large caps within the DJIA, but all indexes are oversold. Frequently, a global crisis like the one underway in Egypt can be the tipping point for the markets to make a correction after strong run-ups, and this case may be no different so caution must be exercised at this time. However, until my technical indicators signal this change, I will stay the course.

Emerging markets are clearly under stress and if your risk tolerance is low, you should consider trimming your positions at this time. The rest of the market must also be carefully watched for signs of a reversal. The New York Stock Exchange Bullish Percent (NYSEBP) that I discussed last week pulled back just over 1% to 78.30, however, it must move down to 74.33 before a reversal occurs.

Bonds are showing some strength as investors reposition cash from more risky asset classes. For now, high-yield and intermediate term corporate bonds are showing the greatest strength recently.

Commodities remain volatile and gold is clearly under pressure. If gold breaks below $1320, positions will need to be reevaluated. Oil has pulled back to the middle of its 10-week trading range and has support at $85 per barrel. Other commodities are showing strong price appreciation and are contributing to the underlying inflation worries spreading throughout the world. The weakening US dollar is also helping to raise commodity prices and stoking inflation fears abroad.

Going into this week, it is too early to tell how the crisis in Egypt will be resolved. Concerns are heightened and investors will be watching developments closely. The Suez Canal is of paramount important to the flow of free trade and its operation will impact much of what global markets do in this current crisis. Every investor should look at their portfolios and assess your current risk tolerance and decide if changes are appropriate.

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.

Emerging market investments involve higher risks than investments from developed countries and also involve increased risks due to differences in accounting methods, foreign taxation, political instability, and currency fluctuation. The main risks of international investing are currency fluctuations, differences in accounting methods, foreign taxation, economic, political or financial instability, and lack of timely or reliable information or unfavorable political or legal developments.

The commodities industries can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. Past performance is no guarantee of future results. These investments may not be suitable for all investors, and there is no guarantee that any investment will be able to sell for a profit in the future.

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. The Russell 2000 Index is comprised of the 2000 smallest companies within the Russell 3000 Index, which is made up of the 3000 biggest companies in the US.

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