Wednesday, December 23, 2015

MARKET UPDATE AND COMMENTARY
December 20, 2015


After seven years, the Federal Reserve finally raised their overnight lending rate a quarter of one percent Wednesday afternoon (December 11th) and markets initially cheered the move with US stock markets posting a three-day winning streak culminating Wednesday with gains of about 1.5% in the major indexes.  Unfortunately, investor enthusiasm vanished on Thursday and Friday as the major indexes gave back all of the gains early in the week to close the week with very modest losses.


Time Period
Dow Jones
Industrial Average
(DJIA)

S&P 500

Russell 2000

NASDAQ
1st Half 2015
-1.14%
+0.20%
+4.09%
+5.30%
Q3 2015
-7.58%
-6.94%
-12.22%
-7.35%
Q4 to Date
+5.18%
+4.45%
+1.85%
+6.56%
Week of Dec 14- Dec 18
-0.79%
-0.34%
-0.23%
-0.21%
Year-to-Date
-3.90%
-2.59%
-6.95%
+3.95%
Source:  The Wall Street Journal (Past performance is not indicative of future returns).  As of market close December 18, 2015.

As the year draws to a close, I suspect that most investors feel like 2015 has been a real let down after a couple of good years of gains without much volatility.  My broad explanation of what has happened would necessarily begin with a discussion about declining oil prices and the devastation of energy-related corporate earnings.  The necessary contraction by energy companies in response to lost earnings has in turn spread over to other sectors most notably the Materials and Industrials sector.  As of December 18th, the analytical company, FactSet, estimates that Energy sector earnings will decline 59% in 2015, followed by the Materials  (-8%), and the Industrials (-1%) sectors.  The losses from these three sectors will overwhelm those sectors that have posted gains to result in an estimated combined decline in profits of -0.5% for companies within the S&P 500 this year.

While International markets did just a bit better last week, there has not been much to cheer about abroad in 2015 either.


Time Period

Global Dow xUS

STOXX 600
Dow Jones
Devel Mkt Region
Total Stock Market
Dow Jones
Emerg Mkt Region
Total Stock Market
1st Half 2015
+3.22%
+11.32%
+2.13%
+2.09%
Q3 2015
-12.60%
-8.80%
-9.09%
-19.33%
Q4 to Date
+2.05%
+3.87%
+3.11%
+1.34%
Week of Dec 14- Dec 18
+0.37%
+1.53%
-0.23%
+2.42%
Year-to-Date
-7.94%
+5.46%
-4.26%
-16.54%
Source:  The Wall Street Journal (Past performance is not indicative of future returns).  As of market close December 18, 2015.
I continue to remain less than enthusiastic about international markets primarily because Europe has shown no ability to deal with the expansive government domination of most economies (high taxes, low growth), the influx of refugees, and negative demographic trend (European families are not reproducing enough children to replace the existing population).  Emerging markets are suffering from bad governance, the collapse of the commodities markets, and a strong US Dollar.  China brings its own set of issues as the leadership there continues to devalue the Yuan, provide unreliable economic data to international investors, and I cannot shake the feeling that they are building cities in which no one lives.  Furthermore, I believe the Chinese economy is extremely immature in that the government still has too much control over data reported and tosses money managers it dislikes into jail to highlight just a couple of problems.  However, I believe facts can change and lead to good investing opportunities.  I will never exclude a market in the face of building momentum, and I have only modestly cut my allocations to developed markets abroad, but I have not made any new investments there either in the past couple of months.

Oil is the most significant story in commodities for the second year in a row.  After the price of a barrel of WTI Oil lost 46% in 2014, it is currently down another 24% in 2015.  I have already discussed the impact this has had on earnings, but I also believe this condition will not last indefinitely.  As oil prices have declined, US consumption has increased for the first time in a number of years.  Higher demand is a natural product of cheaper prices.  Energy production will balance with demand and I believe oil prices will stabilize.  When energy prices stabilize, the threat of inflation will return because the decline in energy prices has masked broader inflation in the economy.  Scott Grannis who writes the Calafia Beach Pundit created the chart below to illustrate this point.

 
The blue line is reported inflation and the red line shows what inflation is when the effects of energy prices are stripped out of the calculation.  When oil prices collapsed back in 1986, you can see how inflation excluding energy maintained its levels as it is doing today.  Assuming oil prices will find an equilibrium (which I believe they will), the mitigating impact of falling oil prices will no longer be present and I would expect Total Inflation (blue line) to return to about 2%.  More on this in the next section.

Before I discuss interest rates and the bond asset category, I want to remind you that the Federal Reserve controls the overnight lending rate between banks and the Federal Reserve.  It does not control any other rates including interest rates paid by the US Treasury on its bonds.  Traders in the private sector determine all other rates.

Interest rates in general increased slightly last week.  There has been much financial media attention to the decline in interest rates Thursday and Friday, however, I think it is impossible to determine the impact of the Federal Reserve’s decision to raise the overnight lending rate simply on rates of Treasuries in the days immediately following the Fed announcement.  Until we see more inflation building into the economy and improving economic growth statistics, I do not believe there will be much change in rates for the short-term.

The real news in the bond world has focused on the high-yield bond sector.  High-yield bonds have seen some negative volatility in the past couple of weeks due to concerns of diminished liquidity (not enough buyers as sellers enter into the market).  Again, much of the story centers on the energy sector because low oil prices have hurt cash flows of many smaller companies and fears are increasing that default rates will increase in the coming months.  One high yield fund manager, Third Avenue Management LLC, suspended redemptions because they could not sell their positions fast enough to meet cash requests.  This announcement sent nervous investors across the entire sector to the exits hurting many different high-yield managers.  Morningstar® reports that the high-yield sector has declined 3.5% over the past month and is now down 4.8% for the year ranking the sector 15th out of the 16 taxable bond sectors Morningstar® ranks.  Nine other taxable bond sectors are negative as well leaving bond investors in the same circumstance as stock investors for 2015 facing negative returns for the first time in a number of years.  If you believe that 2016 will be a better year than 2015, and that energy prices will stabilize as I do, then I believe the recent sell-off in the high yield bond sector is oversold.  However, I will continue to watch this bond sector very closely going forward.


MORE ON ENERGY, THE ECONOMY, AND THE FED

Investors cannot look at events in isolation; the world just doesn’t work that way.  The old kids song, “Dem Bones” that teaches children “the foot bone is connected to the ankle bone, and the ankle bone is connected to the leg bone,” and so on is what comes to my mind when I think about how nearly everything is interconnected in the 21st century and how 2015 evolved. 

Oil is a commodity and as such the value of a barrel of oil is very dependent on supply and demand—economics 101.  The more supply you have of something compared to demand the price will fall.  The opposite is true as well.  For years, the Organization of Petroleum Producing States (OPEC) set the price of oil by colluding to set production levels to maintain acceptable (to OPEC) oil prices.  As US production of oil decreased, the US became the world’s largest importer of oil and was thus vulnerable to OPEC.  As a response to the Arab-Israeli War in 1973, OPEC stopped exporting oil to the United States.  This quadrupled the price oil in just a matter of months.  By 1974, gas lines were common throughout the United States, and OPEC’s power helped push the United States and Israel to negotiate a settlement with the Arabs that was much more favorable to the Arabs then would have otherwise happened.  In the years following, Saudi Arabia willed OPEC to maintain oil prices at levels they determined.  The cartel worked well until 1986 when Saudi Arabia decided to punish non-complying OPEC members who ignored quotas by pumping as much oil as possible, the price of oil plummeted, and the Saudi’s made their point. 

As it has turned out, the 1986 period was just a precursor of things to come.  Since the mid-1970’s the rest of the world made efforts to break OPEC’s stranglehold on oil production and prices.  Oil production began or was expanded in countries like Mexico and Brazil, and exploration began in inhospitable areas like the North Sea and Alaska.  The US passed fuel mileage legislation and over time, we have become a significantly more fuel-efficient country.  The domination of OPEC on the world has been broken.  However, the Saudi’s ability to pump large amounts of oil and push the price of oil down has contributed to the 65% decline in WTI Oil since the end of 2013.  The motivation of Saudi Arabia today is much the same as it was in 1986 and that is to maintain its market share.

The United States has experienced a revolutionary growth in oil production primarily due to giant technological advances.  Proven oil reserves (reachable with current technology) make the US the largest potential oil producer in the world dwarfing Saudi Arabia.  In terms of natural gas, the US has proven reserves that can last for 700 years.  These facts, I believe, should have a significant positive impact on life in the US economically and geopolitically.  However, the rapid decline in oil prices has caused short-term disruptions and I believe we are witnessing the impact of these disruptions including shutting down rigs, loss of jobs, diminished economic growth in supporting industries, and the possible bankruptcy of fringe producers.  As a practical matter, high-yield bond investments in this sector and related sectors may suffer a spike in defaults as the weaker players exit.  I believe these issues are behind much of the recent turbulence in the stock market and the chart below shows the loose correlation between percentage changes in the AMEX Oil Index (blue line) and the S&P 500 Index (orange line).
Longer-term, however, I believe the energy sector will adapt, adjust, and profit.  I cannot stress enough the importance new technology has had in driving down production costs.  I have read that the newest rigs are producing oil for as low as $29 per barrel.  This allows oil companies to be profitable at far lower prices than previously thought.  With the United States resuming its place as the largest producer of oil in the world (and if oil exports are once again permitted), the power of OPEC will continue to diminish and I believe oil prices will stabilize. 

What happens when energy prices stabilize?  Scott Grannis estimates that the bond market is pricing in an inflation rate of just 1.25% over the next five years, considerably below the approximately 2% ex-energy inflation rate currently estimated to be in the economy today.  The connection between stable oil prices and an increase in inflation could force the bond market to re-price bonds down to account for higher inflation should it materialize.  Higher inflation could also lead the Federal Reserve to reevaluate the pace at which it raises interest rates.  Right now markets are generally expecting the Fed to move in a very deliberate (slow) pace in an effort to avoid the kind of shocks on the economy that investors dislike.  However, if inflation gets going, the Fed may have to move faster than what investors are thinking and I believe that may be problematic much as the unexpected size of price declines disrupted the energy sector.  Oil was an important story in 2015 and I believe it will be again in 2016.

LOOKING AHEAD

The year is limping to an unimpressive end.  Many will soon be turning their attention to 2016 and what prospects the new year will bring.  I will address 2016 in an upcoming Update, but for now let’s focus on the near-term.

Most of you are now familiar with the Dorsey Wright & Associates Daily Asset Level Indicator (DALI) chart below.





As of December 20, 2015.  Source: DorseyWright & Associates.

This chart outlines the most basic relative strength relationship between the six major asset categories.  Since my last Update, there has been no change in the order of the six major asset categories, but there has been some changes to the underlying tally scores of each.  Domestic Equities is unchanged both in terms of being the strongest category and with a tally rank of 341.  Fixed Income (bonds) remains number two, but its tally score fell from 238 to 232 meaning other major asset categories have strengthened slightly at the expense of Fixed Income.  Cash, the money market sector, tally increased from 205 to 211.  International Equities added 3, Currency fell by 1, and Commodities added 4.  These small changes are notable only for looking at the subtle changes underway in the markets, however, there is nothing to suggest the need to make any major adjustments to your portfolios.

As I discussed earlier, the drop in the High-yield bond sector is notable.  If you have a short time horizon the weakness is important and may justify some changes, however, if you are a long-term investor, I do not believe wholesale changes in your fixed income allocations are necessary at this time.  However, further weakness may cause me to change this view.  The High-yield sector must be watched closely.  The Fed’s raising interest rates a quarter percent will not, in my view, ease the challenge for investors who require income beyond the meager interest earned on CDs or money market funds.

One additional comment on the fixed income sector.  I mentioned earlier that the fixed income asset category in general has been a disapointment in 2015 with negligible returns at best and a couple of percentage point drop at worst.  As we enter 2016 I am searching for signs to see if 2016 will be any better.  So far I have not found that evidence.  More on this in future Updates as well.

This will be my last Update for 2015.  I hope you and your family have a warm, loving, and happy holiday season. 


Paul L. Merritt, MBA, C(k)P®, 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.

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.  The Dow Jones Global ex-US index represents 77 countries and covers more than 98% of the world's market capitalization. A full complement of sub indices, measuring both sectors and stock-size segments, are calculated for each country and region.

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.


Wednesday, November 25, 2015


MARKET UPDATE AND COMMENTARY
November 22, 2015


The ugliness of radical Islamic terrorism has unfortunately intruded into the lives of people everywhere; however, the markets did not react negatively to the Paris slaughter or the hotel attack in Mali on Friday. 


Time Period
Dow Jones
Industrial Average
(DJIA)

S&P 500

Russell 2000

NASDAQ
October
8.48%
8.30%
5.56%
9.38%
November 2-6
1.40%
0.95%
3.26%
1.85%
November 9-13
-3.71%
-3.63%
-4.43%
-4.26%
November 16-20
3.35%
3.27%
2.49%
3.59%
4th Quarter-to-Date
8.64%
8.22%
6.18%
10.24%
Year-to-Date
0.00%
1.47%
-2.45%
7.79%
Source:  The Wall Street Journal (Past performance is not indicative of future returns).  As of market close November 20, 2015.

While I believe the world did take notice and only the cruel could not be emotionally affected by what has transpired not just last week, but the weeks before; investors appear to be getting accustomed to this sort of violence.  It is a sad commentary on the state of the world, but it is such nonetheless.

The year continues to challenge investors on many fronts, however.  The Dow Jones Industrial Average (DJIA) is virtually unchanged for the year, and the S&P 500 is up just 1.5%.  Small capitalization stocks (represented in the Russell 2000 index) continue to lag the larger companies and this index down about 2.5%.  While a couple of percent gap in performance is hardly noticeable in most years, as investors struggle to find any gains, a 2.5% lag to the larger indexes is noticeable.  Of the four major US stock indexes I track; only the NASDAQ Composite index has managed to push into the upper single digits (+7.8%) led by the Internet and Software & Computer Services subsectors.     

The Energy and Utilities sectors continue to rank at the bottom for performance in 2015 losing about 17% and 8% respectively.  Energy company earnings are simply terrible compared to previous years.  ExxonMobil (XOM) reported third quarter earnings recently of $296.3 billion.  Sounds like a huge number, but it is $139.2 billion less (-32%) than the same quarter in 2014.  Consumer Discretionary (+8%), Information Technology (+7%), and Health Care (+5%) are the top three performing sectors so far in 2015.  Recently, however, the Financial sector has shown strength and is leading all major economic sectors so far in the 4th quarter (+2%).  Consumer Discretionary (-0.2%) has fallen to sixth out of eleven.  I believe this decline in the Consumer Discretionary sector has been a result of weaker than expected retail sales and relatively poor performance of a number of retail stocks; however, I continue to favor this sector at this time.  Stocks in the Financial sector are rallying under the expectation that the Federal Reserve is very close to raising interest rates.  Rising interest rates drive additional profits to banks similar to how higher oil prices drive extra profits to energy companies. 

There has been little change in international markets.  Emerging markets continue to lag significantly while European stocks continue to hold their gains from early in the year.  I continue to remain somewhat bearish on the International category in general because I believe Europe has its hands full with the refugee crisis, the stronger US Dollar, slow economic growth, and sagging commodity prices around the globe.  The notable catalyst that could possibly change the current state of affairs in European stocks would be a positive reaction to major European Central Bank easing in bond markets on a much larger scale than has been undertaken so far.


Time Period

Global Dow xUS

STOXX 600
Dow Jones
Devel Mkt Region
Total Stock Market
Dow Jones
Emerg Mkt Region
Total Stock Market
October
7.36%
7.97%
7.42%
7.52%
November 2-6
-1.04%
1.19%
0.12%
0.66%
November 9-13
-2.22%
-2.74%
-2.92%
-3.48%
November 16-20
2.51%
3.32%
2.79%
2.96%
4th Quarter-to-Date
6.49%
9.78%
7.32%
7.56%
Year-to-Date
-3.93%
11.46%
-0.35%
-11.41%
Source:  The Wall Street Journal (Past performance is not indicative of future returns).  As of market close November 20, 2015.

Commodities continue to lag this year.  The broad-based UBS Dow Jones Commodity index is down 22% year-to-date.  There simply is no good news in commodities and I have been avoiding this major asset category most of the year.

The yield on the US Treasury 10-year bond has eased slightly over the past two weeks helping to cut November’s losses in the Barclays US Aggregate bond index.  The Barclays is still down 0.5% for the month and is up just 0.7% for the year.  Bond investors have struggled to make money in 2015.  According to Morningstar’s® taxable bond sector performance rankings, Preferreds and several Short-Duration sub-sectors are the only positive sectors so far in 2015.  Unfortunately, I do not see much improvement in bonds for the near-term.  If there is any good news in Bond asset category it is that even with the Federal Reserve’s looming rate hike, inflation remains somewhat subdued (thanks primarily to energy prices) and economic growth continues to plod along at about 2% to 2.5% annually.  I do not believe the current data will force the Federal Reserve to move at much more than a glacial pace in raising rates going forward which may keep bond performance from drifting much lower for the time being.

IT’S ALL ABOUT THE NUMBERS

Every day the news cycle is spinning out one negative story after another.  I understand the economic reality of the modern media that bad news sells and good news is boring.  The challenge for all of us is to focus on what is important and ignore what is just white noise.  The news of an expanding radical Islamic caliphate and attacks on innocent civilians is extremely important, but what matters most will be how leaders and nations respond to the news.  We have faced terror before and defeated it, and I believe this time will be no different.  Negative economic news stories continue resonate as well, but they have been out there for years now.  Any investor who has heeded the naysayers and sat on the sidelines since 2008 has missed one of the truly remarkable market recoveries.  How then does an investor cope with the unknown and negativity in the world?  My answer is stick with the numbers.

I have spent the past 16 years of my life immersed in the markets and have seen the end of a great bull market (2000) and the worst bear market (2008 - 2009) since the Great Depression.  I’ll throw in another terrible bear market in for good mix (2000 – 2002).  In short, my time as a financial professional has been anything other than smooth sailing.

In my early years, I recall listening to lots of analysts and economists talk about the same topic or stock and each would draw dramatically different conclusions about how the stock or markets would move.  Maybe I was na├»ve, but I could not understand how two different people could look at the same data and have such opposite opinions.  Any of you who have watched Bulls and Bears on the Fox News Channel know what I mean.  This show normally concludes with one of the regular guests offering a great investment idea only to have another guest immediately say why that investment is a terrible idea.  I realized that I had to find a way that would help remove some of the guess work out of investment decisions, because for many advisors, guess work is all there is.

For me, the answer was discovering Dorsey Wright & Associates (DWA).  Simply stated, DWA takes point and figure charting (invented in the late 1800’s by Charles Dow) and combines it with the relative strength (how one investment performs compared to another) to come up with a technical system that is numbers based, not intuition based.  The only thing that really matters in the DWA system is how prices are moving and identifying trends to take advantage of the current market environment.  I have adopted the DWA system and incorporated the principals into my recommendations for clients.  It is important to stress that the analysis that DWA provides does not predict the future or promise every investment will outperform others, what it does is provide a systematic, rules-based process to frame decisions around.

DWA has kept me in the markets this year as it has since 2009.  DWA is why I am not recommending new purchases of international stocks at a time when some pundits are saying buy.  Why I have avoided commodities for months.  If the time comes and the data says it is time to buy international or commodities, I will, but not before.  I am actually agnostic when it comes to investing and do not favor one investment over another.  My goal is to find and make investments into the strongest sectors and stay there until the numbers tell me something else.  I do not want to oversimplify this concept because there are many other factors that must be taken into account when making investment decisions such as risk tolerance, taxes, time horizon, and the overall objective for the money invested.  These additional factors help drive individual recommendations because everyone is a bit different; however, within the context of each person’s circumstances it is important to have a process when making investment decisions.

I have said previously that investing is hard.  It is hard to pick good investments, it is hard to develop a good portfolio, and it is even harder to stay invested when markets make their normal corrections especially as we all remember what happened in 2008.  However, investing is an essential part of having the money to support ourselves in the years to come and overcoming the serious affects inflation can have on your lifestyle. 

I will have more to say about DWA investing concepts going forward, but I do believe that when you have a numbers-based investment strategy, you are clearly ahead of the pack that uses “gut intuition” to make investment decisions—or those who choose to make no decisions at all. 

LOOKING AHEAD

Geopolitical concerns are clearly at the forefront of investors minds these days.  Unfortunately it has become part of the daily narrative for all of us, but it cannot be the basis of your investment decisions.  As time passes, I do believe that greater attention will be paid on the Federal Reserve.  Right or wrong, investors will be watching the Fed very closely in the weeks and months ahead.

The most fundamental chart that I look at each and every day is this one:







As of November 20, 2015.  Source: DorseyWright & Associates.

This chart outlines the most basic relative strength relationship between the six major asset categories.  Cash, or really the money market sector, serves as my baseline to compare all investments.  Let me explain.  When using relative strength, you are identifying investments that are moving more or less than other investments.  When it is more, life is grand because that means you are making money, but during the less time periods, relative strength can mean an investment is simply declining less than the others…but declining nonetheless.  The Cash asset category is much like a life preserver floating on the water.  Investments above water are good, those below are to be avoided.  This is why I have stayed away from international stocks and commodities for some time.  The data simply does not support investing in these sectors.  This does not mean that you should rush in and sell all your international holdings.  As I noted before, there are reasons to hold on to your international stocks such as large capital gains and other tax considerations.

Other DWA data is saying that growth is favored over value and Small/Mid capitalization stocks are favored over Large cap.  This relationship is a long-term indicator because recently large cap growth stocks have been outperforming the small and middle cap stocks.  I think it is more important to stay focused on growth stocks for now and not be especially concerned about the market capitalization of your holdings.

Within the Fixed Income major asset category I favor the Preferreds, Senior Floating Rate, and High Yield sectors.  High yield bonds have come under pressure recently as the markets have gotten more defensive recently.  I am watching this trend very closely and may be trimming some high yield going forward.  Fixed income has become an increasingly difficult asset category to get returns due to the rising interest rate trend.  Longer duration bonds in particular I believe will have the greatest challenge ahead and would recommend using any declines in interest rates to sell longer-duration bonds for shorter duration bonds.   

If you have any questions or comments, please do not hesitate to reach out to me. 











Paul L. Merritt, MBA, C(k)P®, 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.

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.  The Dow Jones Global ex-US index represents 77 countries and covers more than 98% of the world's market capitalization. A full complement of sub indices, measuring both sectors and stock-size segments, are calculated for each country and region.

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.