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 16^th 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 3^rd 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