Monday, December 24, 2012

Markets have become laser-focused recently on the ebb and flow of negotiations in Washington over the fast approaching fiscal cliff.  Although markets are up slightly in December, positive reaction has been muted to several recent important economic announcements including the upward revision of the 3rd Quarter Gross Domestic Product (GDP) from 2.7% growth to 3.1%, and that the Federal Reserve would extend its massive bond purchases indefinitely.  Friday’s 121-point sell-off was prompted by investors spooked by the apparent impasse between the House Republicans and the White House when the “Plan B” option failed to come to the floor for a vote.  Uncertainty has gripped the markets.

The Dow Jones Industrial Average (DJIA) gained 56 points (0.4%) last week despite the 122-point drop on Friday.  The S&P 500 added 1.2%, the Russell 2000 jumped 2.9%, and the NASDAQ gained 1.7% last week.  For the year, the DJIA is up 8.0%, the S&P 500 is positive by 13.7%, the Russell 2000 has gained 14.4%, and the NASDAQ is up 16.0%.

Financials and Real Estate were the best two performing major economic sectors last week easily beating the S&P 500.  Consumer Staples and Telecom were both down more than 3% and were the weakest performers last week.  For the year, Financials, Consumer Discretionary, and Health Care are the top three performing sectors followed by Industrials and Real Estate.  Utilities and Energy continue to bring up the rear, but as has been the case for most of the year, have posted positive total gains for 2012.

International markets maintained their consistent performance.  The broad MSCI (EAFE) index was up 1.3% last week and is now up 13.7% for the year.  The European STOXX 600 index was up 0.6% and is now up 14.9% for the year.  As I noted last week, the EU is still economically a mess with virtually no growth, 13% unemployment, and crushing debt levels that are sucking the life out of the economy.  However, the European Central Bank (ECB) has stepped forward and is offering to make massive bond purchases like the Federal Reserve and this has quelled the immediate panic and given political leaders some time to fix their broken economies.  The recent strength of international stocks has pushed this major asset category up to the number three position on the Dorsey Wright & Associates (DWA) ranking system ahead of Currencies, Cash, and Commodities.  It is my belief that international stocks do not provide the degree of diversification they once did, but they do give you exposure to some truly excellent global companies not based in the United States.

The bond market has shown some weakness the past few weeks as yields on US Treasuries have crept upwards.  Yields on US Treasuries have risen from 1.612% and 2.806% for the 10-year and 30-year respectively at the end of November to close Friday at 1.770% and 2.936%.  Friday saw investors return to US Treasuries as a safe haven investment, but not enough to boost the Barclays Aggregate Bond index into positive territory for the week.  The Barclays index was down 0.1% for the week and is now down each of the three weeks in December for a cumulative loss of -0.2%.  For the year the Barclays is up 4.4%.  Spanish and Italian bond yields continue to fall as investors in Europe understand that the ECB will ultimately be there to prevent any major losses.  As expected, the Italian Prime Minister, Mario Monti, resigned late Friday evening ushering in a potentially contentious election in the EU’s third largest economy this spring.

The US Dollar index is down 0.8% for the month of December.  The Euro has found renewed strength as the EU and ECB continue to sort out the Greek debt crisis and make progress on an EU-wide banking oversight agency.  The banking oversight agency proposition remains an important component for the financial unification of the EU, however, significant issues remain to be worked out before passage and implementation.  The Euro closed Friday at $1.319 up 1.6% for the month and 2.6% for the fourth quarter.  The US Dollar did rebound Friday as nervous investors returned to the US Dollar as fear prompted “risk-off” trading in the markets.  The Japanese Yen has come back into the headlines as the newly elected Prime Minister, Shinzo Abe, has called for the Japanese Central Bank to resist efforts by the United States and Europe to weaken their currencies at the expense of the Yen.  The Yen has been strengthening against the US Dollar for most of the year, but with Mr. Abe’s recent comments, the Yen has weakened.  Abe is one of the first significant political leaders to openly talk about currency manipulation even though the US, EU, China, and Switzerland have all been doing so via monetary policies for some time now.  This will be a story to watch in 2013.

The Dow Jones UBS Commodity index fell 0.9% last week marking the fourth straight weekly decline.  This broad-based commodity index is now down 2.5% for December and 6.2% for the fourth quarter.  With one trading week left to the year, the index is down 1% for 2012.  Gold fell $43.10 (-2.5%) last week to close Friday at $1652.70 per ounce.  This was the worst weekly percentage decline since late June.  For the month, Gold has fallen 3.5%, and is down 6.9% for the fourth quarter.  Gold is still up 5.5% for the year.  Gold, in my opinion, has not moved upwards in the face of continued monetary weakening by the Fed and ECB because investors have been shifting from gold into more risky assets with the belief that the fiscal cliff will be resolved.  WTI Oil jumped $2.23 (2.6%) per barrel to close Friday at $88.96, but this key commodity remains essentially unchanged (+0.02%) for the month as investors appear to be sitting on the sidelines as Washington tries to sort out the fiscal cliff.  WTI Oil is now down 3.4% for the quarter and down 10.0% for the year.  Coffee, Silver, Wheat, and Soybeans have all fallen at least 10% during the current quarter contributing to the overall weakness of commodities.

A SHOT ACROSS THE BOW

Friday’s market jitters and sell-off resulted from investor disappointment in the political class.  The failure of Speaker Boehner to bring “Plan B” to the floor for a vote was seen as a sign of the dysfunction in Washington and shaking the confidence of investors that an agreement on the fiscal cliff would be reached.  As I have noted previously, there is nearly unanimous consensus among economists, pundits, and money managers that the politicians will find common ground and forge a compromise to avoid falling off the cliff.  While I still hold out hope that there will be at least a small compromise to get us past the end of the year, I remain unconvinced that a grand bargain will be reached in the near-term.  I am also growing skeptical that any deal will provide a meaningful solution to the ever-growing Federal deficit that is the real problem with Washington and our nation’s economy.  I believe we have seen the first shot across the bow from the financial markets.

I would like to devote this week’s commentary to a review of what I believe are some of the key market basics that will help you understand what is happening all around us as the politicians push this country right up to the fiscal cliff.

Economic Policy = Monetary Policy + Fiscal Policy.  This is the key economic equation we must all keep in mind as our political leaders debate the fiscal cliff in Washington.  Economic policy is the collective action taken by governments to influence the economic behavior of a nation’s citizens, businesses, and governmental agencies.  The Gross Domestic Product (GDP), which is a measure of all economic activity within the country, is the report card on economic policy.  Successful economic policy is essential for the long-term strength and success of any country.  Monetary policy is the use of the money supply to support economic growth.  Money supply is controlled by government agencies that have the power to print money, set interest rates, and buy or sell debt (a key tool of influencing money supply).  In the United States, that government agency is the Federal Reserve.  The Federal Reserve has been extraordinarily accommodative using oceans of cash to keep asset prices growing in the face of a generally weak economy.  Fiscal policy is the use of taxation and government spending to influence the economy.  I believe most would agree that the White House and Congress have failed to take responsible action regarding revenues and spending policies for years and this has resulted in the recent spike in US debt.  It is this failure of maintaining a sound fiscal policy that is the focus of the fiscal cliff.

Markets are Forward Looking.  The value of financial markets today, which is reported through key indexes such as the DJIA or the Barclays Aggregate Bond index, represent the belief of investors about the future growth of assets.  If enough investors believe that the future of a company is strong, for example, they will move to buy that company and drive up its stock price.  If enough investors believe in the overall strength of the economy, they will bid up prices across a broad array of companies lifting indexes even at a time when circumstances may be bleak.  Bond investors generally work from a different perspective.  When bond investors believe that the future growth of the economy will be weak or even negative, they are attracted to the interest income and perceived security of owning debt.  Just as demand pushes up the values of individual companies through stock prices, bond investors can push up the price of bonds when pessimism is prevalent.  The one caveat I would add is that the Federal Reserve’s massive intervention has potentially skewed traditional relationships in the free market by flooding the system with cash and artificially driving up the prices of all assets.

Falling Off the Fiscal Cliff Will Result in Higher Taxes and Spending Cuts.  Most analysts will say that the economy’s recovery has been weak and tentative.  The impact of raising taxes and simultaneously cutting spending could cut GDP output by as much as 4% in the first half of 2013 and push the country back into a recession.  It is this reason why most observers believe some agreement will be forthcoming, but a complete failure by our political leaders, I believe, will have an immediate and negative impact on the general economy.

Higher Taxes on Dividends Can Hurt Stock Prices.  Stock prices, just like other assets, are driven by demand, and if taxes go up substantially on dividends, demand can weaken and push down stock prices.  Let me use a simple example to illustrate.  Altria (MO) currently pays a dividend of approximately $1.76 per year for each share of stock.  On Friday, Altria closed at $31.86.  The current dividend yield ($1.76/$31.86) is 5.5%.  The average tax on most dividends is 15% meaning that the after-tax yield on MO is 4.7%.  Investors will buy MO at its current price if they feel that a 4.7% after-tax dividend yield is an adequate return for the risk of owning MO.  If the tax rate on dividends increases to 39.6% under current fiscal cliff law (as it would for many top earners) then the after-tax yield on MO would drop to 3.3%.  Now MO at $31.86 may not look so attractive.  For top earners to receive the same after-tax yield of 4.7% with a new 39.6% tax rate, the stock price of MO would have to fall to $22.64, a drop of 28.9%.  There is no evidence that investors will suddenly sell MO or any other high dividend paying stocks with a dividend tax increase, however, there still remains a real economic consequence to a dividend tax increase and the potential for many dividend paying stocks to adjust prices under a new tax.

Uncertainty Can Increase Volatility.  Uncertainty makes it more difficult for investors to determine valuations on assets.  As facts/events change, prices will change to reflect this new information.  The more change, the more fluctuation.  Volatility causes most investors increased stress especially as they remember the pain inflicted by the financial markets in 2008.  This may help explain why, according to the Investment Company Institute (ICI), investors have withdrawn $137.2 billion from managed stock investments through December 5th of this year at the same time the S&P 500 had gained 12.1%.  Over the same period, the ICI reports that investors pumped $303.0 billion into managed bond portfolios.

As I said in my previous Market Commentary and Update, “failure in Washington would hurt stocks in the short term.”  I still believe this, and I also believe that if Washington delivers an unsound agreement, the joy of passing any agreement will be quickly replaced by the economic reality of a country saddled with unfunded spending for as long as we can all see.  By unsound agreement I mean one that only raises taxes, increases in near-term spending (to stimulate the economy), and does not effectively address the never-ending growth of entitlement spending.  If the nation is burdened with an anti-growth economic policy, then we will resemble Europe’s beleaguered economy that has virtually no growth and an unemployment rate of 13%.  So while I am anxious for an agreement, and I think at least a short-term fix will come, I am also mindful that our political class MUST implement sound and growth-oriented economic policy.

Depending on your perspective, you may or not agree with my assessment.  I admit that I have a conservative economic belief system; however, what really matters in the end is how we handle our investments in light of the economic realities of the world we live in.  I believe that there will always be investment opportunities, and the financial services industry has created many new investment tools to take advantage of those opportunities.  It is critical that you have a systematic process for evaluating markets and determining which major asset classes you should weight your investments, and to do so consistent with your ability and need to handle risk.  I believe my knowledge of the tools and information provided to me by Dorsey Wright & Associates helps give me the insight to navigate markets in these challenging times.  If you would like more information about these tools, I would be happy to share that knowledge with you.

LOOKING AHEAD

The fiscal cliff negotiations will dominate the airways for the remainder of the year.  Event driven markets like the ones we have had since 2008 have the potential, in my opinion, to increase volatility and fray nerves.  With the key players in the fiscal cliff negotiations on holiday for the next few days, it is hard to say if Friday’s volatility will be repeated on Monday’s shortened trading day or even the first full day following the Christmas market closure.  However, I would anticipate more trading volatility associated with the fiscal cliff uncertainty in the last few days of the year and into the start of 2013.

My broad market indicator of trend and risk, the New York Stock Exchange Bullish Percent (NYSEBP) reversed last Thursday, December 20th, to a column of X’s meaning demand is back in control.  The NYSEBP has been in a positive trend since bottoming at 53.59 on November 16th, and closed Friday at 60.38.  I see this as a very positive signal, however, it will be extremely important to see if the NYSEBP can continue increasing.  I say this because the previous two highs—76.04 on February 17th and 67.38 on Septemer 14th have been getting sequentially lower. This series of decreasing highs is not a bullish trend.  Therefore, I will remain cautious until I see if the NYSEBP can push above 67.38 and create a higher high than the previous one. 

The CBOE Volatility index (VIX) has increased following the recent activity in the markets and closed Friday at 17.84 the highest close since November 7th.  The VIX has also moved slightly above its 100-day moving average suggesting higher volatility in the near term.  However, the VIX is well below its 5-year average of 25.64 and still below its long-term average of 20.47.  I believe this is suggesting that although volatility may be higher going forward, we are not facing the massive disruptions associated with 2008 and other recent economic shocks for now.

There are no signicant economic reports next week except for Thursday’s Initial Jobless Claims and November New Homes Sales.  Initial claims are expected to increase 4000 from 361,000 to 365,000, and new home sales are expected to increase from an annual rate of 368,000 to 375,000.  There is general consensus that the housing market has bottomed and is moving upwards.

The DWA analysis of the markets has seen a change in the overall ranking of the five major asset categories with International Stocks moving from fourth to third behind US Stocks and Bonds.  Currencies has moved to fourth position and Commodities remains in last place.  Middle capitalization stocks are favored, as is growth over value, and equal-weighted indexes over capitalization-weighted indexes.  Equal-weighted indexes are those where each stock in the index is weighted the same, while in capitalization-weighted indexes the larger stocks have the largest weighting consistent with their size relative to the other stocks.  On a relative strength basis, the top three major economic sectors are unchanged: Consumer Discretionary, Health Care, and Financials.  Real Estate, Consumer Staples, and Information Technology are in positions four through six.  Energy and Utilities are the bottom two sectors.  US Treasuries and International Bonds are favored in the Bond category, while US and Developed Markets are favored within the International stock category.  India and China have been making some strong moves in the past month or so in the International stock category and I am exploring options in these regions.  Energy and Agriculture are the favored sectors within the Commodity category.
My next Market Update and Commentary will be published in two weeks.  No doubt it will be a very interesting time.  I hope everyone has the opportunity to celebrate this joyous holiday season with family and friends, and I wish you a very Happy New Year!






Paul L. Merritt, MBA, AIF®, CRPC®
Principal
NTrust Wealth Management

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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.
Emerging market investments involve higher risks than investments from developed countries and 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.  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 CBOE Volatility Index - more commonly referred to as "VIX" - is an up-to-the-minute market estimate of expected volatility that is calculated by using real-time S&P 500® Index (SPX) option bid/ask quotes. VIX uses nearby and second nearby options with at least 8 days left to expiration and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index.
TIPS are U.S. government securities designed to protect investors and the future value of their fixed-income investments from the adverse effects of inflation. Using the Consumer Price Index (CPI) as a guide, the value of the bond's principal is adjusted upward to keep pace with inflation. Increase in real interest rates can cause the price of inflation-protected debt securities to decrease.  Interest payments on inflation-protected debt securities can be unpredictable.
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.

Currencies and futures generally are volatile and are not suitable for all investors.  Investment in foreign exchange related products is subject to many factors that contribute to or increase volatility, such as national debt levels and trade deficits, changes in domestic and foreign interest rates, and investors’ expectations concerning interest rates, currency exchange rates and global or regional political, economic or financial events and situations.

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. 

 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 and is a capitalization-weighted index meaning the larger companies have a larger weighting of the index.  The S&P 500 Equal Weighted Index is determined by giving each company in the index an equal weighting to each of the 500 companies that comprise 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 Russell 2000 Index Is comprised of the 2000 smallest companies of the Russell 3000 Index, which is comprised of the 3000 biggest companies in the US.   The NASDAQ Composite Index (NASDAQ) is an index representing the securities traded on the NASDAQ stock market and is comprised of over 3000 issues.  It has a heavy bias towards technology and growth stocks.  The STOXX® Europe 600 is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index.  With a fixed number of 600 components, the STOXX Europe 600 represents large, mid, and small capitalization countries of the Eur

Monday, December 10, 2012

Markets have been drifting slightly higher the past couple of weeks on no real news—economically or politically.  Economic reports have reflected this indifference by providing a mixture of modest gains and declines, and it is becoming increasingly clear that Washington is going to push negotiations on the fiscal cliff right up to end, if not beyond.  News from Europe was also mixed as German officials indicated that economic growth in this critical country has slowed significantly while Greece appears to be nearing completion of an important bond buy back operation clearing the way for another round of bailout funds.

The Dow Jones Industrial Average (DJIA) gained 130 points (1.0%) last week and is now up 7.7% for the year.  Gains in the other major US indexes were less robust last week.  The S&P 500 added just 0.1%, the Russell 2000 was essentially unchanged, and the technology-heavy NASDAQ fell 1.1% as Apple shares fell nearly 9%.  For the year, the S&P 500 is up 12.8%, the Russell 2000 is up 11.0%, and the NASDAQ is up 14.3%.

Real Estate, Financials, and Energy were the top three performing sectors last week gaining more than 1%, while Materials, Information Technology, and Consumer Discretionary were the weakest losing between a modest -0.2% to a little more than -1%.  For the year, Consumer Discretionary leads all sectors with more than a 23% gain followed by Financials and Health Care.  With just 15 trading days left in the year, six of the eleven major economic sectors have outperformed the S&P 500.  In addition to the top three, Telecom, Industrials, and Consumer Staples have returns exceeding the S&P 500.  Utilities, Energy, and Materials are the bottom three performers for the year, with Utilities posting a slightly negative return (excluding dividends).  With dividends included, every economic sector is positive for the year.

International markets continue to perform well in spite of troubles around the world.  The broad MSCI (EAFE) index was up 0.8% last week and is now up 11.0% for the year.  The European STOXX 600 index was up 1.2% and is now up 14.2% for the year.  With all of the turmoil within the EU, the most common explanation I have read about the strength of the European equity markets has more to do with recovery from very oversold levels rather than a vote of confidence for future economic growth.  For the year, growth is consistent across all the major regions around the world with very little advantage between them.

The bond market was unchanged last week with the Barclays Aggregate Bond index losing just -0.01% for the week.  The yields on US Treasuries rose slightly on the November jobs data, but the 10-year (1.623%) and the 30-year (2.813%) yields continue to reflect significant pessimism about the future growth of the US economy.  As I have reported previously, buying a US Treasury bond at nearly any maturity today could mathematically lead to a loss when inflation is factored in.  There are several widely accepted ways to measure inflation.  First, is the Consumer Price Index (CPI) prepared by the Bureau of Labor Statistics (an agency within the Department of Labor).  The latest CPI data shows the current rate of inflation at 2.2%.  The Bureau of Economic Analysis, found within the Department of Commerce, calculates the Gross Domestic Product (GDP).  As part of their calculation, they strip out the effects of inflation to determine “real” GDP.  Known as the GDP deflator, this measure of inflation was just reported at 2.8%.  Some economists see this number as a better indicator of true inflation because it is calculated across the entire economy, not just a specific basket of goods.  Whether you choose to use the CPI as a measure of inflation, or the GDP inflator, what is clear is that to own a US Treasury bond today could provide a negative real return on your investment. 

The US Dollar index gained 0.3% last week marking the first positive week in the past three.  The Euro fell just one-half of one cent to close the week at $1.293.  For the year, the Euro/US Dollar value is now essentially unchanged.  A report in the Wall Street Journal suggests that the US Dollar index has become a barometer on the direction of equity markets (WSJ Dollar Index Shows the Way for the Stock Market, December 7, 2012, by Stephen L. Bernard and Vincent Cignarella).  According to Bernard and Cignarella, “the current 60-day correlation between the WSJ Dollar index and the Dow stock index is currently negative -0.91 where 0 means there’s no correlation at all and negative -1 means a perfect negative correlation where one rises while the other falls.”  So recently when the US Dollar has strengthened (risk off), the stock market has subsequently fallen.  While there is no likelihood this relationship will last or is one which I would develop a trading strategy upon, I do believe that it shows how the “risk on” and “risk off” mind-set has become a major feature in today’s markets.

The Dow Jones UBS Commodity index fell 0.9% last week for the second week in a row.  Gold has fallen $46.30 (-2.6%) over the past two weeks to close Friday at $1705.50 per ounce, while WTI Oil has also fallen -2.6% over the past two weeks to close at $88.26 per barrel.  Analysts report that oil prices have fallen due to increasing inventories and lower demand, and that gold prices have fallen because investors are concluding that the Federal Reserve’s policy of continued bond purchases has not weakened the US Dollar as anticipated.  While I believe that oil prices move more on fundamental supply and demand issues, I believe that gold prices are much more subjective and dependent on investors’ perceptions about overall global monetary policy and the threat of imminent currency weakness—especially the US Dollar.  A strengthening US Dollar has reduced the price of gold recently.


CLOSING OUT 2012

The US economy has found and maintained a steady, albeit weak heartbeat in 2012.  The November employment report confirmed that the growth of new jobs has been just enough to avoid slipping back into a recession.  Scott Grannis, one of my favorite economic analysts (Calafia Beach Pundit), believes that the US economy requires a monthly growth rate of 130,000 jobs to meet population growth, and the average monthly growth rate of 151,000 in 2012 has provided that and a bit more.  However, Scott also believes that this anemic growth rate will not be adequate to raise tax revenues sufficiently to pay for the current and projected levels of government spending.  I share his beliefs on these subjects.  The consequence of the employment situation and economic growth in the US leaves further gains vulnerable to the political games currently being played in Washington—especially if the outcome in Washington is higher taxes for the majority of taxpayers.

There are just 21 days left in 2012.  The President and the Republicans in Congress do not appear to be making any progress regarding the looming tax hikes and spending cuts known as the fiscal cliff.  I said two weeks ago that I doubted a grand bargain would be reached, and the more likely scenario would be a small agreement that would postpone the full consequences of the fiscal cliff into early 2013.  I hedged my comments by reminding everyone that to expect any meaningful compromise was questionable because all of the same players are in place today as was two years ago, as will be in January.  Watching the past two weeks of “negotiations” has left me more pessimistic than before.  I believe today that there is almost zero chance that a grand bargain will be achieved, and I am growing more doubtful that any meaningful compromise will be realized anytime soon.  So the key question now is how will the markets react to this new reality?

How you answer that question depends on whether you believe the markets have discounted, or baked in the bad news, into current market valuations. 

Bond yields are sitting near historic lows signaling a pessimistic view of long-term economic growth.  As I discussed earlier, US Treasury yields are so low that investors today are potentially locking in losses in real terms out to almost thirty years.  Can rates go lower, absolutely, but how much lower?  I believe they could fall further but not significantly lower.  Bill Gross of PIMCO recently opined that the growing debt level in the US would contribute to annualized bond returns in the 3% to 4% range over the next few years, not the 6% average annual return of the Barclays Aggregate Bond index over the past 15 years.  For bond investors accustomed to these near equity-like returns, it may leave an empty feeling.  Additionally, bond investors must be sensitive to interest rates especially of longer duration US Treasuries and corporate bonds.  In my view, any sharp increase in interest rates will hurt these sectors the greatest.

Depending on which pundit you listen to, stocks, particularly US stocks, are either very overvalued or a great bargain.  Not the kind of clear guidance anyone likes to hear.  Each side has empirical evidence to support their views, however, the immediate question is are stocks overpriced or cheap today?  Using the Dorsey Wright & Associates ten-week trading band (ten-week price history) as an indicator, most US stocks are just slightly overvalued.  The lack of any recent price movement tells me that investors are more or less holding tight waiting for the circus in Washington to sort itself out.  If you are nervous or have a very low risk tolerance, than I believe you should be underweight stocks in your portfolio, and if I were forced to make a call on stocks, I would say that failure in Washington would hurt stocks in the short term.  The severity of any selloff would depend on investor belief that a reasonable compromise could emerge from our political leaders in a reasonable timeframe.

The rest of 2012 and early 2013 will remain a challenging time for investors.  I hope that our leaders will put the best interest of the American people ahead of their political aspirations or parties.  I cannot think of a time in recent history where we need grownups in Washington more than we do today!



LOOKING AHEAD

My broad market indicator of trend and risk, the New York Stock Exchange Bullish Percent (NYSEBP) continues to see supply (selling) in control, but the percentage of stocks in a buy signal has improved somewhat following three consecutive weekly gains.  The NYSEBP closed Friday at 56.40 up from a low of 53.59 on November 16th.  The percentage of stocks in a buy signal must improve to 59.70 before buying momentum will have sufficiently returned to put the NYSEBP into column of X’s (demand/buying in control).  Another consideration is the NYSEBP is around its mid-point of 50 suggesting that risk is not especially high or low at this time. 

The CBOE Volatility index (VIX) remains at a subdued level closing Friday at 15.87.  Since the start of the year, the VIX has ranged from a high of 27.73 on June 4th to a low of 13.45 on August 17th.  The VIX is an important indicator of investor nervousness and fear of increased negative volatility.  To help put the VIX in perspective, the VIX reached 89.53 at the height of the 2008 market on October 24, 2008.  The VIX can move sharply, however, for now it is not flashing major fear signals.

The coming week has several important economic events.  First, the Federal Reserve Open Market Committee (FOMC) will be meeting and Chairman Bernanke will address the press on Wednesday afternoon.  The Fed is expected to leave its target for short-term interest rates between 0% and 0.25%, with the only unknown being the language about the anticipated duration of this policy.  For now, the Fed has committed to this low interest rate policy until mid-2015.  There is also some expectation that Chairman Bernanke may address additional bond purchases geared to stimulate the economy and lowering unemployment by keeping mortgage rates low.  International Trade will be released on Tuesday.  Investors will be watching exports very closely to try and gauge the health of the global economy—increasing exports will be seen as a positive signal.   Weekly Jobless Claims will be reported on Thursday morning as usual and consensus is calling for 370,000 new claims with no change from the previous week.  Finally, Retail Sales for November will be released on Thursday morning.  Sales are expected to jump 0.6% following a Hurricane Sandy-reduced -0.3% change in October.

The Dorsey Wright & Associates analysis of the markets remains unchanged as it has for most of the year at this point.  Data indicates that US stocks and Bonds are the two favored major asset categories followed by Foreign Currencies, International stocks, and Commodities.  Middle capitalization stocks are favored, as is growth over value, and equal-weighted indexes over capitalization-weighted indexes.  Equal-weighted indexes are those where each stock in the index is weighted the same, while in capitalization-weighted indexes the larger stocks have the largest weighting consistent with their size relative to the other stocks.  On a relative strength basis, the top three major economic sectors are unchanged: Consumer Discretionary, Health Care, and Financials.  Consumer Staples, Real Estate, and Information Technology are in positions four through six.  Energy and Utilities are in the bottom two sectors.  US Treasuries and International Bonds are favored in the Bond category, while US and Developed Markets are favored within the International stock category.  Energy and Agriculture are the favored sectors within the Commodity category.

As a reminder about how event driven the markets have become.  Overnight Sunday (December 9th), the Italian Prime Minister, Mario Monti, announced he would step down as soon as the 2013 budget was approved.  The Italian stock market has fallen more than 3% on the news as of this writing.  Event driven markets make investing challenging because traditional economic factors can take a back seat to headlines.

My next Market Update and Commentary will be published in two weeks.  I hope everyone is wrapping up their holiday shopping and plans are in place for your family’s celebrations.






Paul L. Merritt, MBA, AIF®, CRPC®
Principal
NTrust Wealth Management

P.S.  If you think this type of analysis would be of benefit to anyone you know, please share this communication with them.

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.
Emerging market investments involve higher risks than investments from developed countries and 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.  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 CBOE Volatility Index - more commonly referred to as "VIX" - is an up-to-the-minute market estimate of expected volatility that is calculated by using real-time S&P 500® Index (SPX) option bid/ask quotes. VIX uses nearby and second nearby options with at least 8 days left to expiration and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index.
TIPS are U.S. government securities designed to protect investors and the future value of their fixed-income investments from the adverse effects of inflation. Using the Consumer Price Index (CPI) as a guide, the value of the bond's principal is adjusted upward to keep pace with inflation. Increase in real interest rates can cause the price of inflation-protected debt securities to decrease.  Interest payments on inflation-protected debt securities can be unpredictable.
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.

Currencies and futures generally are volatile and are not suitable for all investors.  Investment in foreign exchange related products is subject to many factors that contribute to or increase volatility, such as national debt levels and trade deficits, changes in domestic and foreign interest rates, and investors’ expectations concerning interest rates, currency exchange rates and global or regional political, economic or financial events and situations.

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. 

 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 and is a capitalization-weighted index meaning the larger companies have a larger weighting of the index.  The S&P 500 Equal Weighted Index is determined by giving each company in the index an equal weighting to each of the 500 companies that comprise 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 Russell 2000 Index Is comprised of the 2000 smallest companies of the Russell 3000 Index, which is comprised of the 3000 biggest companies in the US.   The NASDAQ Composite Index (NASDAQ) is an index representing the securities traded on the NASDAQ stock market and is comprised of over 3000 issues.  It has a heavy bias towards technology and growth stocks.  The STOXX® Europe 600 is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index.  With a fixed number of 600 components, the STOXX Europe 600 represents large, mid, and small capitalization countries of the European region.

Monday, November 26, 2012


Markets rallied this past week as investor outlook regarding the fiscal cliff improved enough to give most major indexes their second best performance of 2012.  Additionally, the cease-fire between Israel and Hamas helped calm markets abroad, and helped make Moody’s downgrade of French debt the previous week a distant memory.  However, concerns are beginning to resurface in Europe as the European Union (EU) has been unable to reach agreements on an overall EU budget and on further Greek debt restructurings.

The Dow Jones Industrial Average (DJIA) gained 421 points (3.3%) last week over three and one-half days of trading including a 173-point gain in light trading Friday.  The other major indexes followed with the S&P 500 added 3.6%, while the Russell 2000 and NASDAQ gained 4.0% each.  Four weeks through a five-week trading month, major US indexes remain in negative territory albeit in a much better place than the previous Friday’s close.  As of Friday’s market close, the DJIA is down 0.7% for November, the S&P 500 is off 0.2%, the Russell 2000 has fallen 1.4%, and the NASDAQ is down 0.4%.  With forty-seven weeks of trading completed so far in 2012, the DJIA is up 6.5%, the S&P 500 has added 12.0%, the Russell 2000 has increased 8.9%, and the NASDAQ leads with a gain of 13.9%.

Ten of the eleven major economic sectors were positive last week led Materials, Consumer Discretionary, and Information Technology all of which were up between 4% and 5%.  The Utilities sector was the only negatively performing sector losing just under 1% continuing a trend of under-performance that has dogged this sector most of the year.  For the year, the Consumer Discretionary sector leads with just over a 22% gain, closely followed by the Financials and Health Care sectors.  Utilities, Energy, and Real Estate are the three weakest sectors with only Utilities posting a negative return for the year.

International markets were up sharply last week despite the troubling news emerging from the EU Summit meeting late last week.  The MSCI (EAFE) index gained 4.8% and the European-only STOXX 600 added 4.0%.  I am having difficulty identifying specific reasons for the strength of European markets given the abysmal state of that region’s economy and the increasing difficulty for leaders there to achieve any meaningful solutions to their debt problems.  The European Union (EU) budget debate crystallizes the challenge facing the EU with leaders like Great Britain’s David Cameron demanding spending cuts for the EU at a time when most countries are struggling with budget cuts at home, while other leaders suggest that spending be increased to help the weaker EU economies.  Even as EU leaders are saying all the right things about being close to resolving the current economic crisis, I believe that more challenges will come from over the Atlantic as we move into 2013.

US Treasuries fell last week as investors’ appetite for risk returned which in turn benefited more equity-sensitive bond sectors such as high yield and preferreds.  The US Treasury 10-year yield closed Friday at 1.691% jumping from the previous week’s close of 1.580%.  Rising interest rates push down the value of bonds accounting for the weakness in the Treasury sector and making extended duration Treasuries the weakest performing bond sector last week.  The Barclays US Aggregate Bond index fell 0.3% last week following a couple weeks of limited strength and is now down 0.1% for the month, and up 4.3% for the year.  International bonds also did well as the US Dollar weakened against most major international currencies.

The US Dollar index fell 1.3% last week for the first losing week in the past five.  I believe this move can be attributed to the US Dollar role as one of the key “safe haven” investments over the past couple of years, and as investors sought out greater risk in their portfolios, the US Dollar was sold last week to buy other currencies like the Euro (+1.8%) and the Japanese Yen (+1.3%).  The movement of the US Dollar was reflective of a “risk-on” trade last week as investors were buoyed by optimistic comments by key European leaders such as German Finance Minister Wolfgang Schäuble’s about resolving the Greek debt crisis. 

The Dow Jones UBS Commodity index gained 2.2% last week boosted by a weakening US Dollar.  With nearly all commodity contracts traded in US Dollars, a weaker US Dollar makes commodities cheaper for international buyers helping to boost demand.  Gold increased by $37.10 (2.2%) to close Friday at $1751.80 per ounce bolstered by the hope of a European solution in Greece.  WTI Oil was also up 1.5% to close Friday at $88.26 marking the third weekly increase in a row.  Gold is up 1.9% for the month and 11.8% for the year, while WTI Oil is up 2.3% for the month and is down 10.7% year-to-date.

TOUGH TIMES BUT THERE ARE POSITIVES

The looming fiscal cliff has dominated, and will continue to dominate, the financial conversation at least until the end of the year.  And for good reason.  Failure to reach some kind of resolution and compromise on the key tax and spending issues associated with the fiscal cliff has the potential to push an already weak economy into another recession.  While the overwhelming consensus is that a compromise can and will be reached (this view helped pushed markets upward this past week), this belief is built upon an assumption that both political parties recognize that failure would result in political suicide.  I share, to a degree, that optimism; however, I still recall just how bitter previous the negotiations were and most of the same players and dynamics remain in place.  I also believe that achieving a grand bargain in such a short period is unlikely.  There are simply too many major issues to get resolved in just a couple of weeks.  Therefore, I believe a more realistic course of action will be an agreement to disagree and an extension of the deadline into the first part of 2013.  The markets may remain nervous (read volatile), however, kicking the can down the road will not, in my view, lead to a major negative market correction.  With this short-term outlook reviewed, let’s take a moment to discuss some of the real positives that exist for the longer-term.

My partner, Stacy, and I attended our national broker/dealer (Commonwealth Financial Network) conference just a few weeks ago over the first weekend in November.  This meeting gives us the opportunity to hear from some of the nation’s leading economists and money managers.  When I listen to the various speakers, I listen for common themes among them and the implications of what they say.  This conference provided several themes that I want to share with you:

1)      The United States has the largest oil reserves in the world, dwarfing the Middle East, and we can be completely energy independent by the end of this decade.  Proven technologies in oil and gas extraction will provide the United States with multi-generational, affordable, energy.  Given the opportunity to exploit these resources (not a complete certainty with the current EPA); the energy sector would create approximately 3 million new jobs.  The other macro aspect of energy independence would be an improvement to the national Gross Domestic Product (GDP) by several percentage points because our imports would be significantly reduced.

2)      US manufacturing will continue to expand.  The United States is the most prolific manufacturing country in the world, and this lead will continue.  Having access to cheap energy is an important component to this expansion, but so is our world-leading manufacturing technology and flexible, well-educated labor force.  The US will never be the home of unsophisticated, labor-intensive, industries again; however, we will continue to attract sophisticated manufacturing from around the globe.

3)      Global infrastructure will command major investments.  The economic development within many emerging market countries will necessitate the build-out of ports, roads, electric transmission capabilities, and airports.  The aging infrastructure here in the US will force municipal, state, and federal spending on deteriorating bridges, roads, and airports.  Finally, the growing energy infrastructure requirements will see additional pipeline, port, and other infrastructure spending both here in the US and North America.

What makes these three themes so powerful is the expectation that they are sustainable and will lead to millions of new high-paying, high-quality jobs.  These jobs will be not only be directly related to the various industrial sectors mentioned, but also in the peripheral economy, most notably in home construction.  The future is actually bright should we make a vigorous effort at exploiting our natural advantages.

LOOKING AHEAD

After a month if deterioration, the New York Stock Exchange Bullish Percent (NYSEBP) saw a slight improvement this past week.  The NYSEBP finished October at 62.68 with demand (buying) in control and then moved to a low of 53.59 on November 16th with supply (selling) in control.  In the past five trading days, the NYSEBP has risen slightly to close at 54.73.  Supply is still in control, and by definition, it would take an increase to 59.59 for the NYSEBP to reverse back to demand.  For those who may not be familiar with the NYSEBP, it is the primary technical indicator I use to determine the general trend of the markets.  The NYSEBP is calculated by looking at each stock listed on the New York Stock Exchange, determining if it is in a buy or sell signal (using a Point and Figure chart), and adding up all of the buys and dividing that number by the total number of stocks listed on the New York Stock Exchange.  This indicator provides a broad and important view of market trend and general risk level.  At reading of 53.59 means that nearly 54% of stocks are in a Point and Figure buy signal, but selling pressure currently exists (the NYSEBP has been falling).  The risk is moderate with just over half of stocks giving a buy signal.  If the NYSEBP was 70% or greater, risk would be considered high; while a percentage of less than 30% would represent lower risk.

Europe will remain in focus.  The EU, the International Monetary Fund (IMF), and the European Central Bank (ECB) are struggling to deal with the heavy load of outstanding Greek debt.  I believe that the key players are coming to the conclusion that Greece will never be able to pay back all of their outstanding bonds, so other methods of reducing debt are under consideration such as simply buying the bonds on the open market.  Efforts by EU leaders to instill confidence in the process has certainly calmed the bond market, however, it has also undermined this process by driving up Greek bond prices making bond purchases by the EU a more expensive proposition.  Economic stress in Spain has also raised the specter that the Catalan region of Spain is going to move forward with an independence referendum.  The British paper, The Telegraph, reports that today’s (Sunday) elections will bring a pro-independence party into power, and that 57% of Catalans support independence from Spain.  The main complaint is that Catalonia is paying more than their fair share of taxes to the Spanish federal government.  Any vote of independence is likely several years to the future, but calls into question the integrity of the EU at a difficult time.

The upcoming week has several important economic reports due out. The most significant will be the second estimate of the 3rd Quarter US GDP.  Consensus is anticipating an upgrade to 2.8% from the first estimate of 2.0%.  Such a jump would be a very strong indicator of an improving economy.  October New Home Sales is expected to show a very minor drop from the annual rate reported in September of 389,000 units to 387,000.  Additionally, the weekly Initial Jobless Claims report for last week is expected to show an improvement of 20,000 from the previous week’s surprisingly high 410,000 to 390,000.  In general, these and the other economic indicators continue to reflect an economy that is growing, but a very modest rate.

The Dorsey Wright & Associates analysis of the markets remains unchanged as it has for most of the year at this point.  Data indicates that US stocks and Bonds are the two favored major asset categories followed by Foreign Currencies, International stocks, and Commodities.  Middle capitalization stocks are favored, as is growth over value, and equal-weighted indexes over capitalization-weighted indexes.  Equal-weighted indexes are those where each stock in the index is weighted the same, while in capitalization-weighted indexes the larger stocks have the largest weighting consistent with their size relative to the other stocks.  On a relative strength basis, the top three major economic sectors are unchanged: Consumer Discretionary, Health Care, and Financials.  Consumer Staples, Real Estate, and Information Technology are in positions four through six.  Energy and Utilities are in the bottom two sectors.  US Treasuries and International Bonds are favored in the Bond category, while US and Developed Markets are favored within the International stock category.  Energy and Agriculture are the favored sectors within the Commodity category.

My next Market Commentary and Update will be published in two weeks.






Paul L. Merritt, MBA, AIF®, CRPC®
Principal
NTrust Wealth Management

P.S.  If you think this type of analysis would be of benefit to anyone you know, please share this communication with them.

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.

Emerging market investments involve higher risks than investments from developed countries and 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.  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 CBOE Volatility Index - more commonly referred to as "VIX" - is an up-to-the-minute market estimate of expected volatility that is calculated by using real-time S&P 500® Index (SPX) option bid/ask quotes. VIX uses nearby and second nearby options with at least 8 days left to expiration and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index.
TIPS are U.S. government securities designed to protect investors and the future value of their fixed-income investments from the adverse effects of inflation. Using the Consumer Price Index (CPI) as a guide, the value of the bond's principal is adjusted upward to keep pace with inflation. Increase in real interest rates can cause the price of inflation-protected debt securities to decrease.  Interest payments on inflation-protected debt securities can be unpredictable.

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.

Currencies and futures generally are volatile and are not suitable for all investors.  Investment in foreign exchange related products is subject to many factors that contribute to or increase volatility, such as national debt levels and trade deficits, changes in domestic and foreign interest rates, and investors’ expectations concerning interest rates, currency exchange rates and global or regional political, economic or financial events and situations.

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. 

 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 and is a capitalization-weighted index meaning the larger companies have a larger weighting of the index.  The S&P 500 Equal Weighted Index is determined by giving each company in the index an equal weighting to each of the 500 companies that comprise 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 Russell 2000 Index Is comprised of the 2000 smallest companies of the Russell 3000 Index, which is comprised of the 3000 biggest companies in the US.   The NASDAQ Composite Index (NASDAQ) is an index representing the securities traded on the NASDAQ stock market and is comprised of over 3000 issues.  It has a heavy bias towards technology and growth stocks.  The STOXX® Europe 600 is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index.  With a fixed number of 600 components, the STOXX Europe 600 represents large, mid, and small capitalization countries of the European region