Wednesday, June 29, 2011

US markets were mixed this past week following a flurry of economic news. The Federal Reserve announced that the economy was slowing and revised growth forecasts downward, the International Energy Agency (IEA) unexpectedly announced that it would tap oil reserves, Europe remains embroiled in Greece's debt crisis, and Republican legislators walked from on-going debt reduction negotiations.

For the week, the Dow Jones Industrial Average (DJIA) lost 70 points (-0.58%) to close at 11,935 and the S&P 500 lost 3 points (-0.24%) to close at 1268. The Russell 2000, an indicator of smaller capitalization stocks, quietly posted a gain of 2.05%. For the month of June the DJIA is down 5.05%, the S&P 500 is down 5.71%, and the Russell 2000 is down 5.95%. Returns for the year remain positive for the DJIA (3.08%) and S&P 500 (0.86%), and the Russell 2000 is once again positive with a year-to-date return of 1.80%.

Sector returns continues to be somewhat schizophrenic as last weeks worst performer, Materials, led this week with over a 3% gain. Consumer Discretionary, Information Technology, and Industrials round out the top four weekly sector gainers. Consumer Staples, Utilities, Real Estate, and Financials were the bottom four. For the year, Health Care, Consumer Staples, Real Estate, Energy, and Telecom are the top five performers; while Financials, Information Technology, Materials, Industrials, and Consumer Discretionary are the bottom five. Only Financials, Information Technology, and Materials have under performed the DJIA and S&P 500 so far in 2011.

International markets remain under pressure challenging the European Union's ability to cope with the growing problems in Greece and to a lesser extent, Italy. The MSCI (EAFE) World index was down 0.80% for the week and is now down 5.71% for the month. Fears remain centered around Greece and the possible spread of the debt contagion to other southern European countries such as Spain and Italy. This uncertainty has resulted in European countries holding the bottom 10 of 12 country positions of my list of 66 countries that I follow for the month of June. Both developed and emerging markets are struggling to remain above or even turn positive from an absolute return basis. Today, developed markets hold a slight performance edge over emerging markets so far in 2011; however, emerging markets remain favored on a relative strength basis.

Commodities generally fell across the board pushed by the sudden drop of oil prices following Thursday's 9:00 AM (EDT) announcement by the IEA that the 28 country organization of consuming nations had agreed to release 60 million barrels of oil from their strategic oil reserves over the next 30 days. The announcement precipitated a drop of 6% in the price of a barrel of West Texas Intermediate crude. At one point during Thursday the price fell below $90 before closing at $90.39. Friday saw oil prices rise slowly closing at $91.18 compared to the previous week's close of $92.91 (-2.22%). Gold prices fell $35.50 (2.31%) for the week to close at $1500.50. Gold's fall was attributed to reduced inflation expectations on both the fall of oil and slowing global growth. The Dow Jones UBS commodity index fell 2.20% for the week and is now down 4.24% for the year.

The Barclays Aggregate Bond Index resumed its winning ways by picking up 0.35% for the week marking the 10th up week out of the past eleven. The 10-year US Treasury yield closed at 2.872% its lowest weekly close since December 1, 2010. US Treasuries have rallied this week on the turmoil in Europe and continued negative economic news here at home. Fed Chairman's Bernanke downgrade on the outlook of US economic growth solidified the rally. Overall it was another good week for most bond categories led by Treasury Inflation Protection notes (TIPs), high yield, emerging market bonds, and investment grade bonds. International inflation protection notes, international treasuries, and very short duration bonds were the poorest performers. For the year, international treasuries and TIPs, municipals, and US TIPs have been the best performers while high yield and short duration have been the worst. The good news is all have positive returns when interest is factored into total returns.

THE MEDIA CHORUS IN HARMONY

The headlines in the press have turned decidedly bearish as the markets turn more negative. Since the beginning of May, the DJIA is off 6.84%, the S&P 500 is off 6.98%, and the Russell 2000 is off 7.80%. International stocks have fared worse with the MSCI (EAFE) index off 9.12%. There is no doubt that the economic data has justified this pullback. First time unemployment data remains firmly above 400,000 each week, the US economy is growing at less than 2%, the housing sector is mired in foreclosures and short sales even as the Federal Reserve has maintained interest rates at near record lows. Europe is barely hanging on. So not surprising it is all doom and gloom in the media.

But does the media's obsession with negative reporting offer an indication that things may be turning around? There has been an interesting dynamic going on recently within the many technical indicators I follow. Just as the news turns more and more pessimistic each day, my technical indicators have been showing signs of leveling off. The rate of change to the downside has slowed significantly or even turned slightly positive. The volatility in the market is certainly present, but when you step back and look at weekly chunks of data, the net result of all the ups and downs, the numbers are less dramatically bad. Does this mean that we are out of the woods? Absolutely not. But, to use a military metaphor, we have stopped the initial rout and have started to establish a defense.

There remain a lot of uncertainties. The sudden drop in oil prices is a result of a one-time injection of oil. The Saudis hold the key to establish more permanent price improvement if they in fact come through with extra production. The Greek problem is challenging. I still believe that this immediate crisis will be dealt with, but the Greek's must make unpopular and meaningful cuts to spending. Watching the on-going riots in Athens makes most investors doubtful, and ultimately longer term issues must still be worked out for all of the southern-tier countries. Finally and most importantly, the US economy must get turned around. Our debt limit negotiations must be dealt with in a mature and relevant manner, Americans must get back to work, the housing market must clear, and our spending must be brought down to a sustainable level.

But for now, going into July, the first signs of the markets stabilizing are showing. By the time the media chorus starts singing the same song, it may be time to tune out.

LOOKING AHEAD

The markets are in a nervous state and can be expected to react to most key economic news. This coming week there will be five major points of data released by the government. The most significant will be the first time jobless claims on Thursday and the Institute for Supply Management (ISM) Manufacturing Index on Friday. The markets are going to be watching closely for any indications that the economy is beginning to come out of the "soft patch" it is currently mired in.

Stocks are generally still favored over bonds, small and mid-capitalization stocks favored over large. Growth over value, and equal-weighted indexes over capitalization-weighted. While I have no significant preference within the various broad economic sectors other than avoiding Financials, I am concentrating more on Health Care, Consumer Staples, Real Estate, and Energy. Utilities have proven to be a good bond-alternative option within the equity space.

I am avoiding any major new investment in the international category and have been trimming some of my more volatile investments recently. If you have a desire to raise cash in your portfolio, weaker international investments may be sold. I firmly believe that over the coming years emerging markets have the potential to offer many outstanding opportunities, but for now, be wary. I will address individual positions with you on a case by case basis.

Commodities have come under stress recently but longer-term precious metals and energy remain favored. Please keep in mind that this is a highly volatile sector and entering positions in this category should be done so with the understanding that you are likely to experience greater volatility than with many other investments.

Most bonds have been a stable investment so far in 2011. Going into the last week in June, bonds remain the most overbought asset category of the five I follow; however, I am not reducing my exposure to this important category. I prefer high quality corporates, emerging market debt, and TIPs. I know that I have been telling you that over the longer-time I do not like TIPs, but they have shown recent strength. While high yield bonds have fallen to the bottom bond sector recently, I will keep an eye on this important asset class for improvement if stocks stabilize.

I remain cautious and defensive; however, we could be reaching an important point in the markets over the next couple of weeks. No one can predict which way the markets will turn with any certainty, but my work with technical indicators can help to give insight to what the markets are doing and I remain poised to react either way.

On a personal note, I will taking some time off over the July 4th holiday weekend and will not publish an Update next week. I hope that each of you have a great 4th with family and friends. Let's celebrate the birth of our country and be reminded about the greatness of what we have achieved and what we will achieve.

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 Dow Jones UBS Commodities Index is composed of futures contracts on physical commodities. This index aims to provide a broadly diversified representation of commodity markets as an asset class. The index represents 19 commodities which are weighted to account for economic significance and market liquidity. This index cannot be traded directly. 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.

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