MARKET
UPDATE AND COMMENTARY
September 15, 2013
Stock markets have rallied the first two
weeks of September even though economic data remains mixed and lacking any real
direction.
For the first two weeks into September the
Dow Jones Industrial Average (DJIA) is up 3.8%, the S&P 500 is up 3.4%, the
Russell 2000 has gained 4.3%, and the NASDAQ is up 3.7%. International markets have also participated
in this two-week rally as the Dow Jones Global ex-US index added 4.7% with help
by a strong performance from the emerging markets region. Bonds continue to struggle under the upward
trend of interest rates with the Barclays US Aggregate Bond index down 0.6% for
the month. For the year, the DJIA is now
up 17.3%, the S&P 500 has gained 18.4%, the Russell 2000 is up 24.1%, and
the NASDAQ is up 23.3%. The Dow Jones
Global ex-US index is up 8.2%, and the Barclays US Aggregate Bond index is down
3.5%.
Opinions of investment experts on why the
markets have rallied after a tough August are as diverse as economic data,
however, I believe investor fears have been greatly diminished by the
ever-decreasing prospect of US involvement in the Syrian civil war. WTI Oil prices fell 2.1% last week but remain
elevated from recent levels closing Friday at $108.21 (+12.1% since the end of
June). Gold, after rallying in July and
August, has also pulled back sharply and is down 6.3% for the month and down
21.8% for the year.
RELATIVE
STRENGTH
I
would like to take advantage of a relatively quiet couple of weeks to spend a
few minutes discussing the concept of relative strength. Those of you that have followed my Update and
Commentary for any length of time have heard me refer to relative strength
frequently. It is at the very heart of
my analysis of the markets and a tool which I believe offers market insight
without any bias or emotion. It is
simple in concept yet robust in application.
Jump
forward to yesterday and 46 games later, you can see that the Red Sox have now
pushed to the top followed by the Rays.
The Yankees have moved up to third place while the Blue Jays remain fixed
in last place.
The
concept for relative strength in analyzing investments works the same way as in
sports, except I measure price changes between each stock/investment instead of
wins and losses. Coupled with computer
power, it is now possible to make one-on-one comparisons or compare dozens of
investments with each other. I use the
services of Dorsey Wright & Associates (DWA) out of Richmond, Virginia, for
the software support to do this.
Additionally,
DWA has expanded this simple analysis to broad and powerful uses such as the
Dynamic Asset Level Investing (D.A.L.I.) tool.
D.A.L.I. uses a matrix comprised of 1079 different data points divided
between six major asset categories (US stocks, International stocks, Bonds,
Currencies, Commodities, and Money Market) to determine relative strength
relationships. All 1079 data points are
compared to each other daily (1,164,241 separate calculations) to develop a
ranking that gives investors an idea which of the six major asset categories
are the strongest—just as the standings in baseball do. Additionally, DWA takes this analysis down to
sectors within each major asset category, and for my analysis, customized
groups of investments.
Like
any investment process or strategy, there are times when that process or
strategy will underperform; however, having such a strategy has permitted me to
tell my readers that US stocks has been the strongest major asset category
since October 24, 2011, during which time the S&P 500 is up about 51%. By comparison, the MSCI EAFE index
(international stocks) is up about 20%, Money Market is flat, the Barclays US
Aggregate Bond index is down around 3%, and the DJ UBS Commodity index (broad
basket commodity index) is down 10.8%. I
will say again, this process is not fool proof and past performance is not
indicative of future returns, however, I do believe there is value in
understanding the current relative strength between investments and looking for
changes in relationships when they occur.
Remember
that relative strength is an unbiased, unemotional way to evaluate the
markets. How else could a die-hard
Yankee fan say that if the Red Sox were a stock, I would be buying it going
into the playoffs!
LOOKING
AHEAD
US stocks are still the favored major asset
category as tracked by Dorsey Wright & Associates. US stocks continue to hold the number one
position while International stocks is a solid number two. Fixed-income is in third place, Currencies is
fourth, Money Market is fifth, and Commodities remain in last place where this
category as been since June 21, 2012. Middle
and small-capitalization stocks are preferred over large-capitalization
stocks. Equal-weighted indexes are
preferred over capitalization-weighted indexes.
Within the Fixed-Income category, high yield and bank loan bond sectors
are favored, while energy is now favored in the weak Commodities category.
My next Update and Commentary 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
