July US economic reports generally came in ahead of expectations this past week helping push US and global markets higher.  Consumer sales jumped in July by 0.8% easily beating the consensus number of 0.3%.  Industrial production and consumer sentiment also beat the consensus to the upside.  Housing starts came in a little under expectations, but permits jumped significantly increasing confidence about this important sector going forward.  Consumer prices were unchanged in July, but producer prices jumped 0.3% raising concerns that price inflation is working its way into the system.  Overall, however, economic data continues to show that the US economy is slugging its way forward and not in immediate risk of slipping back into another recession.

 

The Dow Jones Industrial Average (DJIA) added 67 points (0.5%) last week while the S&P 500 gained 0.9%.  Both the DJIA and S&P 500 have now been positive for the past six weeks.  The Russell 2000 gained 2.3% and the tech-heavy NASDAQ added 1.8%.  I believe that when the smaller stocks of the Russell 2000 outperform the DJIA and S&P 500, this is an indicator that investors have increased their appetite for risk.  For the year, the DJIA is up 8.7%, the S&P 500 is up 12.8%, the Russell 2000 has gained 10.7%, and the NASDAQ is up a strong 18.1%.

Nine of the eleven major economic sectors were positive last week with eight of the eleven outperforming the DJIA.  The best performing sectors for the week were Information Technology, Consumer Discretionary, Industrials, Financials, and Materials.  The weakest were Utilities, Health Care, and Energy.  For the year, Information Technology has had a strong year followed by Consumer Discretionary, Telecom, Financials, Real Estate, and Health Care.  Utilities, Energy, and Materials bring up the rear, but as I have noted before, all sectors have positive returns for the year.

The MSCI (EAFE) posted a 0.8% weekly gain marking the fifth consecutive week this broad, but European-heavy, international index has been positive.  For the year, the MSCI (EAFE) is now up 5.2%.  The European markets have had what I would describe as a stealthy bull market since their recent bottom on June 4, 2012.  Since that low point, the STOXX Europe 600, a broad European-only (18 countries) index, has risen 16.7% while the S&P 500 posted a 10.6% gain over the same timeframe.  For the year, the STOXX Europe 600 trails the S&P 500 by more than 1%, so although there have been signs of life in European stocks, the region has still underperformed the US thus far in 2012. 

The Barclays US Aggregate Bond index posted its second losing week in a row dropping 0.7% for its second largest weekly loss in 2012 as US Treasury yields continued push higher.  For the week, the US 10-year Treasury rose another 0.16% to close Friday at 1.814%.  While 0.16% does not sound like much of an increase, it was the third largest weekly jump in yield so far in 2012.  The US 30-year yield increased 0.18% to close at 2.932%.  This was also the third largest weekly gain for the 30-year US Treasury yield in 2012.  I believe that interest rates have been rising primarily because bond investors are growing less certain about the Federal Reserve intervening with another round of quantitative easing. With the relatively good US economic data recently, the Federal Reserve will be less likely to intervene, especially going into the final months of the US presidential election cycle.  In Europe, the yield on Spanish 10-year bonds continues to fall and closed Friday at 6.443%.  Italian 10-year yields also fell while German and French 10-year yields rose somewhat proportionately with US yields.  For the week, longer duration bonds of all types underperformed, while high yield, preferreds, and short duration bonds fared the best. 

Currencies remain relatively stable while Europe and the most of the world are on vacation in August.  The Euro added just 0.33% closing at $1.233 compared to a week earlier close of $1.229.  The Euro has traded in a very narrow range between $1.22 and $1.25 for most of August and I suspect that this trend will continue until September when policy makers get back to work and start addressing the details of plans to get Europe back on solid financial footing.  The US Dollar index was up a very small 0.05% reflecting the muted movement among key currencies last week.

Commodities were little changed.  The broad Dow Jones UBS Commodity index fell a slight -0.06% last week.  The price of a barrel of WTI oil, however, was a notable exception and continued to rise adding $2.62 (2.8%) to close Friday at $96.01.  The price of WTI oil is up 9% so far in August following July’s 3.6% increase.  According to AAA, the average price of a gallon of regular gas is now $3.72 compared to $3.45 just one month ago (a 7.8% increase).  The Obama administration is so concerned about rising oil prices that it has floated the idea of tapping the strategic oil reserve in an effort to hold down oil prices during the fall campaign season.  The jump in oil prices this week has been attributed to an unexpected drop in existing supplies here in the US, but I believe that the ever-increasing instability in the Middle East, especially the anti-Israel rhetoric coming from Iran, is adding to concerns among oil traders.  Gold fell slightly for the week and is now up just $4.80 (0.3%) for the month.  Gold traders will be watching Federal Reserve Chairman Bernanke’s comments at the Fed’s Jackson Hole conference closely for any indications about the prospect of new quantitative easing in the future.  Coffee, sugar, and aluminum were the weakest individual commodities for the week while platinum and oil were the strongest. 

HAVE YOU NOTICED HOW LITTLE VOLATILITY THERE HAS BEEN IN THE MARKETS LATELY?

One of the biggest fears many investors have is that of volatility.  Let me put it another way.  One of the biggest fears that many investors have is losing a lot of money quickly.  This fear of volatility has kept some investors on the sidelines over the past year or two as stock markets have posted decent gains and cash has been earning virtually no interest.  That is what fear can turn itself into, no gains or even negative gains in safe haven investments while markets rise. I am not advocating risky investments for most of my clients, but I do think a better understanding of volatility and how it is measured, can be another important tool to help judge risk levels in the market.

Volatility is most commonly measured by the Chicago Board Options Exchanges Volatility Index (VIX).  In the basic terms, the VIX is a measure how much an investor must pay for protective options contracts on the S&P 500 index.  The price of these protective options contracts increase as the S&P 500 falls.  The faster the index falls the more the options cost.  Likewise, when the markets are rising, especially in an orderly way, the cost of protective options fall and with it the VIX index.

When the markets were losing massively during 2008, the VIX reached a high of 79.13 on October 24, 2008.  That day the S&P 500 lost 3.4% of its value and was down a staggering 40.3% for the year.  By the end of 2008, the S&P 500 managed to regain about 3% of its losses and the VIX fell to 40.0.  As of market close last Friday, the VIX stood at 13.45.  The VIX has not been this low since late February 2007.  During 2004 to 2007, the markets had an orderly and relatively steady climb.  The S&P 500 gained 9.0% in 2004, 3.0% in 2005, and 13.6% in 2006.  Beginning in March of 2007, the VIX started rising before peaking dramatically in 2008.  I would suggest that the markets in 2012 are similar to the markets in 2004, 2005, and 2006 where the S&P 500 posted modest gains while the VIX remained subdued.  The VIX’s moving average for the past year is just under 23 indicating that volatility in the market has been decreasing and the expectation is that the likelihood of a major market correction is diminished for now.

This does not mean you can fall asleep with your investments.  I have been pointing out frequently that there are critical issues facing investors.  The European debt crisis and our own “fiscal cliff” are just two of the biggest challenges staring us in the face today.  The Middle East is another that I am sensing is heating up again.  For now, markets are showing a bias towards slow and steady growth, but investors must keep their heads in the game.  At the same time, you cannot let your fear of volatility or what you hear in the latest news cycle diminish your judgment.  As I always say, “listen to the data.”  Do not be reckless, but prudent and informed before making investment decisions.

LOOKING AHEAD

If the daily traffic jam at the Hampton Roads Bridge Tunnel here in southeastern Virginia is any indication of how many people are traveling to our beaches on vacation, then it must be the high vacation season for most Americans.  And so it is for many financial markets here and abroad.  According to MarketVolume.com, the average daily trading volume for the thirty stocks within the DJIA over the past year has been 736 million shares.  Last Friday the volume was 445 million shares, a decrease of nearly 40% in daily activity.  So traders are away and market activity and direction for now lacks the credibility of the majority.

The upcoming week brings few major economic reports that have the potential to move the markets, especially early in the week.  The first major report is the July Existing Home Sales on Wednesday morning.  Consensus is calling for an annual sale rate of 4.5 million homes compared to June’s number of 4.35 million homes.  Later in the afternoon the focus will be on the Federal Reserve’s Open Market Committee release of the minutes from it’s last meeting.  Investors will be parsing the minutes to determine the conviction, or lack of conviction, by the Federal Reserve regarding a new (Photo by: Ben Schumin) round of quantitative easing.  In recent years, the Federal Reserve has exerted strong influence over the stock and bond markets, and this influence remains.  If the Fed implies that quantitative easing is coming, I believe the prices of both stocks and bonds will be lifted.  The regular Initial Jobless Claims report will be out Thursday morning with no change expected from last week’s report of 365,000 new claims.  Finally, Friday wraps up with the July Durable Goods Orders report.  This important gauge of future manufacturing strength is expected to show a slight increase from 1.6% in June to 1.9%.  Modest and sustained manufacturing strength has been one of the keys that has kept the US economy from slipping back into recession.  Investors want to see this continue.

The New York Stock Exchange Bullish Percent (NYSEBP) closed at 58.96 up from 57.37 (2.8%) from the previous week.  This is the ninth positive week by this important indicator out of the past ten.  The S&P 500 index has become moderately overbought at a reading of 61% with the latest gains.  Recall that the degree of how overbought or conversely, oversold, an investment or index is, is based upon the previous ten weeks of price information.  If the overbought/oversold number is 0%, then the price is at the mean of the past ten week’s data.  If the price is 100% overbought, then it is said to be at the far right of a normal bell curve of price dispersion.  A bit wonky, but a great indicator of where the price of an investment or the value of an index lays with respect to the previous ten week’s worth of data.  With the S&P 500 overbought at 61%, this tells me that the index has been rising steadily and is about where it generally should be at this point.

The Dorsey Wright & Associates analysis of the markets indicate 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.  The relative strength sector weightings favor Consumer Discretionary, Real Estate, Information Technology, and Health Care.  US Treasuries and International Bonds are favored in the Bond category, while US and Developed Markets are favored within the International stock category.

Sincerely,

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

Markets were up slightly around the world this past week on no particular theme. Economically, 2nd quarter productivity in the US came in at a higher than expected 1.6% increase indicating that workers are producing more for each hour worked. Productivity growth is an important indicator about the competitiveness of the US economy and growth is clearly positive. China reported flat (+1%) year-over-year growth in exports disappointing investors who had been expecting exports to grow by 7% or 8%. Slowing exports from China serves to confirm concerns that the global economy has slowed and continues to slow.

The Dow Jones Industrial Average (DJIA) added 112 points (0.85%) last week while the S&P 500 gained 1.1%. The Russell 2000 gained 1.7% and the tech-heavy NASDAQ led the major indexes posting a 1.8% gain. For the year, the DJIA is up 8.1%, the S&P 500 is up 11.8%, the Russell 2000 has gained 8.2%, and the NASDAQ is up a strong 16.0%.

All but one (Real Estate) of the major eleven economic sectors was positive for the week with six sectors out-performing the DJIA. Energy, Materials, and Information Technology were the best performing sectors while Real Estate, Utilities, and Consumer Staples were the worst. For the year, all sectors are clearly positive led by Information Technology, Telecom, Consumer Discretionary, and Financials. Utilities, Energy, and Materials are the weakest sectors to date, but all are up at least 4%. This continues to be a year where the difference between the best and worst performing sectors is smaller than usual. The difference between the best performing sector (Information Technology) and the worst (Utilities) is about 13% while the average from 2003 to 2011 has been 38%. Reviewing the data shows that this year, the best performing sector is not significantly out-performing the market while the worst performing sector is doing relatively well. I would not read too much into this analysis other than the recognition that sector weighting, which can be an important driver of good portfolio returns, has not provided much benefit to investors this year.

The MSCI (EAFI) posted a 1.82% weekly gain marking the first time this broad but European-weighted index bettered the DJIA in four weeks. I do not read much into this positive return since most of Europe is on vacation in August and investors are expecting little movement until the all-important European Central Bank meeting occurs on September 6th. The Asian/Pacific region led all major global areas last week with a gain of 2.9% while the Americas region trailed at a 1.4% gain.

The Barclays US Aggregate Bond index was down a slight -0.1% for the week leaving the index essentially unchanged over the previous two weeks. US Treasury yields, however, rose for the week (pushing down bond prices) with the 10-year closing at 1.658% compared to the previous week’s close of 1.569%. The US 30-year yield increased to 2.747% from 2.649%. German, Italian, and French 10-year yields all fell with only Spanish 10-year yields rising last week. I point this out because this is the first time since the week of May 25th that the US and German yields did not move in the same direction. The Spanish 10-year settled Friday at 6.907% indicating much concern remains with the Spanish. I do not believe you should read too much into last week’s bond yield movements only because there is so little news moving the markets right now. The more equity-sensitive bond sectors such as preferreds and high yields were the best performing bond sectors last week while extended duration Treasuries and corporate were the weakest on the modest interest rate rise.

Currency movement has also been muted. The Euro fell less than 1 cent (-0.7%) to close Friday at $1.229. The US Dollar Index closed up 0.2% for the week with little conviction in the currency markets. I believe that many currency investors, like their stock and bond counterparts, are in a wait and see mode for a while.

Overall, commodities were up very slightly. The Dow Jones UBS Commodity index, which is a broad basket of commodities, gained 0.2% for the week. The best performing commodity sectors were the oil and timber sectors. Among the worst performing sectors were sugar, coffee, and livestock. Corn prices were relatively stable even as the drought worsened. WTI Oil gained nearly $2 per barrel (2.2%) to close at $93.39. Gold gained $13.80 per ounce (0.9%) to close Friday at $1623.10. I will remind everyone that oil tends to trade more on supply/demand fundamentals and the strength or weakness of the US dollar while gold is a measure of investor sentiment regarding central bank policies regarding central bank willingness to print money. The gold jury is leaning towards the US Federal Reserve engaging in another round of quantitative easing (printing money) with some doubters holding the gold bulls back for now. Look for more activity to pick up as we approach the end of August meeting of the Federal Reserve at Jackson Hole, Wyoming. Investors believe the Chairman, Mr. Bernanke, will signal the likelihood of the Fed taking more measures in the future to boost growth (i.e. print more money) going forward and that will probably boost stocks and gold prices. If he fails to deliver a monetary stimulus message, I believe the stock markets could come under some short-term pressure and gold prices would fall as well.

CAN CENTRAL BANKERS SAVE THE DAY?

Yes it is August, and yes many professional traders and investors here and abroad go on vacation in August, and yes markets tend to drift in August. The past two weeks have been a good example of the markets’ August indifference with little net movement in many stock and bond markets. So let me take this quiet time to ask the question, “Can the central bankers around the world help push us into more robust economic growth?”

To answer this question let me provide a very brief overview. Central bankers control monetary policy. They regulate the supply of money within their respective countries through various tools such as bond buying or selling in the open markets, setting certain interest rates (discount rate), and other less well-known operations. For most central bankers, their responsibility is to keep inflation in check through sound money policy. Here in the US, the Federal Reserve has a dual mandate: keep inflation in check and foster full employment.

The other side of the economic equation is fiscal policy. Fiscal policy is created and executed by political leaders. In most of the developed world that means democratically elected leaders are empowered by their citizens to pass laws regarding the structure and governmental tools to govern commerce. These policies are wide-ranging and very diverse and include issues such as labor laws, regulations governing business activities, taxation and levels of government spending. In well functioning capitalistic markets, central bankers compliment the work done by the politicians to help businesses and individuals succeed and grow. When either side gets it wrong, problems result and economies suffer. I think any objective person can look at our own recent economic past and find fault and blame on both sides of the economic equation, but can our current situation be fixed just by central bankers. The answer I believe is a resounding NO.

The tools of central banks are actually quite limited. Important but limited. I was having a discussion with friends recently about why inflation has not kicked in with such an expansion of money in our economy. The answer is pretty simple actually, banks are not lending to their capacity. There is $1.5 trillion in excess reserves in the banking system. This means banks could lend up to an additional $1.5 trillion but they are not. If they did, economic activity would likely soar along with inflation. So for now, the money is not in the producing economy and not pushing up inflation. But money supply is the big tool of central banks, they have used it, and not achieved a vibrantly growing economy and unemployment is still above 8%. So I again say, central bankers cannot fix the problem. Only our political leaders can fix the real structural problems in our economy, and until they do, central bankers will continue to try and find creative ways to buy time for our political leaders to fix our structural problems.

We are in a calm before the storm. This calm has been created by central bankers through massive monetary easing, but it is up to political leadership around the world to lead their economies to fiscal soundness before economic stresses punish everyone.

LOOKING AHEAD

I have heard a number of expressions to describe our economy. Muddling and plow horse are two of my favorite expressions. They all fit to some degree. Neel Kashkari of PIMCO funds wrote last month that there are two major downside risks to the markets today, 1) the sovereign debt crisis in Europe spinning out of control, and 2) the US falling off the fiscal cliff in 2013 with a major tax increase and massive federal spending cuts. On the positive side, Mr. Kashkari believes that if the Federal Reserve institutes another round of quantitative easing, the stock and bond markets would likely benefit. However, with so much uncertainty about which outcome we will see, markets, I believe, are likely to continue to muddle through.

So how to proceed? I believe Brian Wesbury, Chief Economist for First Trust Advisors, said it best last Monday (August 6th) when he stated, “In the end, the way for investors to avoid mistakes in this environment is to watch the data and avoid political spin.” I would add that investors should be wary of the spin financial media outlets put on news reports today. Rely on the data, not the emotion.

The Dorsey Wright & Associates (DWA) current technical analysis shows US stocks and Bonds as the two strongest major asset classes followed by Currencies, International stocks, and Commodities. Within the US stock asset class, Middle capitalization stocks are favored, growth is favored over value, and equal-weighted indexes are favored over capitalization-weighted indexes. On a relative strength basis, Real Estate, Consumer Discretionary, Health Care, and Information Technology are the four strongest sectors on a relative strenght basis. Energy, Materials, and Utilities are the weakest. Within the Bond major asset category, US Treasuries and International bonds are favored.

The New York Stock Exchange Bullish Percent (NYSEBP) closed at 57.37 up from 53.77 (6.7%) from the previous week. A solid showing. Bonds in general and municipal bonds specifically remain very overbought indicating that prices have gotten very expensive in relation to prices over the past ten weeks. I would not initiate new positions here.

The most important economic report next week is July’s Retail Sales and will be released Tuesday morning at 8:30 AM. Consensus calls for an increase of 0.3% compared to the drop of -0.5% last month. This is such an important report because retail sales comprise 70% of our gross domestic product (GDP). Economists also look at this report closely for an idea of the health of the consumer. Other key reports include July’s Industrial Production and Consumer Price Index on Wednesday morning, the weekly Jobless Claims (365,000) and Housing Starts on Thrusday morning. A number of countries in Europe and Japan will be releasing their 2nd quarter GDP data. Do not expect any good news there.

Sincerely,

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.

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.

As has seemingly been the case for 2012, markets careened from one news story to another last week leaving most stock indexes slightly higher and bonds a bit lower. Following reports on July 26th that quoted the European Central Bank President, Mario Draghi, saying he would, “do whatever it takes” to save the Euro, markets generally rallied and interest rates for Spain and other weak European countries fell sharply. This past Thursday, Mr. Draghi delivered a speech that failed to deliver on expectations and markets sold off only to rally Friday on a “positive” US employment report.

The Dow Jones Industrial Average (DJIA) added 22 points (0.16%) last week while the S&P 500 gained 0.36%. The Russell 2000 fell nearly 1% and the tech-heavy NASDAQ added 0.33%. If not for Friday’s strong markets, every stock index would have been in negative territory for the week. July’s muted returns mirrored the past week’s performance. For the month, the DJIA was up 1.0%, the S&P 500 was also up 1.3%, and the NASDAQ added 0.2%. The small and mid-capitalization-heavy Russell 2000 was down 1.4%. For the year, the DJIA is up 7.2%, the S&P 500 is up 10.6%, the Russell 2000 has gained 6.4%, and the NASDAQ has posted a leading 13.9% gain.

Five of the eleven major economic sectors outperformed the DJIA. Information Technology led with just over a 1% gain last week followed by Real Estate, Financials, Consumer Staples, and Industrials. Health Care was the weakest sector losing just under 1% followed by Utilities, Consumer Discretionary, and Materials. The bottom four sectors all posted slightly negative returns for the week. For the year, Real Estate remains the best performing sector posting a nearly 16% gain followed by Information Technology, Financials, and Consumer Technology. All but Energy, Utilities, and Materials have outperformed the DJIA so far in 2012, and all sectors are positive through the 31st week of trading.

The European-heavy MSCI (EAFE) index fell sharply on Thursday following Mr. Draghi’s remarks, but rallied alongside US indexes on Friday to finish 1.5% higher for the week. To summarize what has happened with Mr. Draghi over the past week I would simply say he over-promised and under-delivered. After pronouncing that the ECB would do whatever it takes on July 26th, investors implied (rightly or wrongly) this to mean he would immediately begin buying the bonds of Spain, Italy, and the other struggling European countries. Investors were expecting Mr. Draghi to announce details about how he was going to save the Euro at his press conference last Thursday. When he failed to deliver, European markets sold off sharply and interest rates on sovereign bonds jumped in the weaker countries. I believe that Germany’s continued resistance to more aggressive ECB monetary policy prevented Mr. Draghi from announcing new bond purchases and curtailed his plans. Even so, the European Union may have been given an August reprieve to continue their efforts to enact serious fiscal and political reform.

The employment data coupled with the US Federal Reserve Chairman’s recent remarks indicating the Fed will not take any immediate steps to further stimulate monetary policy in the US pushed the US dollar down for the week. The US Dollar Index fell 0.4% last week and is now down three of the past four weeks. The Euro managed a very modest 0.5% gain last week to close Friday at $1.238 rallying on the US employment report.

Bond markets were flat following the equity markets’ rally Friday with the Barclays US Aggregate Bond index up just 0.1% for the week. The Spanish 10-year yield jumped to 7.17% on Thursday following Mr. Draghi’s comments but rallied on Friday to close at 6.85%. Friday’s risk-on trade in turn pushed down US bonds with the 10-year and 30-year Treasuries dropping for the week as interest rates rose to 1.57% and 2.65% respectively. I understand this may be a bit hard to follow so I will try to simplify. US bonds are a “safe haven” place for investors to place their money when they are nervous. Buying US bonds pushes up the price of bonds (more demand equals higher prices) and thus drives down the interest rate. Spanish and Italian bonds are very risky assets today. When investors are nervous about their money, they sell riskier assets (including Spanish and Italian bonds) to invest their money in “safer” investments. This has the effect of driving prices down on risky assets and interest rates higher on Spanish and Italian bonds. Friday, when investors were feeling more secure, they returned to buying riskier assets and the prices of Spanish and Italian bonds rose causing their interest rates to fall.

Commodities had a good July. The Dow Jones UBS Commodity index, which measures a broad basket of commodities, gained 6.5% for the month on the strength of corn and other grain prices. Oil also contributed significantly to this positive return. The story of the drought and escalating grain prices in the US is well known by now and I believe that food inflation will be seen in higher grocery prices in the coming months. For the week, the Dow Jones UBS Commodity index fell 0.4%, however, grain prices remain high and oil jumped 1.4%. Oil prices rallied on the US employment report and brighter prospects for global economic growth. Oil was also helped by the weakening US dollar. Oil closed Friday at $91.40 per barrel. Gold retreated as it appeared that central banks were not going to ease monetary policy in the short-term. As I have said before, the price of gold provides an insight into the likelihood of monetary easing or contraction by central banks. For now, the printing presses have slowed and with that, the price of gold has pulled back just a bit.

HAVE WE BECOME FRANCE?

On a recent Saturday evening, Virginia and I were returning home from Stafford, Virginia, after spending a wonderful day celebrating our granddaughter’s 7th birthday. I was listening to Larry Kudlow on the radio and one of his guest speakers was one of my favorite economists, Brian Wesbury of First Trust Advisors. Brian made a statement I thought I would never hear in my lifetime. He said that the United States had become France! Ouch. He went on to say we had become France because we now have unemployment routinely greater than 8%, persistent economic growth of 2% or less, runaway government spending, and a shrinking defense budget.

Last Friday, the US grew private sector employment by a relatively paltry 172,000 while overall employment improved by 163,000 (the government sector shrank by 9000). Yet the DJIA rallied 217 points (1.7%). Why? Because we are now France. Investors were expecting an even more anemic jobs report, but were happily surprised by the larger number. Yet, the unemployment rate actually added an additional 0.1% to 8.3% overall. Forty plus months of 8% or greater unemployment—sounds a lot like France.

However, the employment report did another very important thing. Most economists believe that with average jobs growth somewhere in the 150,000’s to 170,000’s, it is becoming more and more likely that the US is not going into a second recession. This growth rate, as bad as it is, is still enough to keep our economy growing at a France-like rate. This in turn has reduced the chances that the Federal Reserve will step in with another round of monetary easing (quantitative easing—QE). While some investors would love the immediate “pop” the stock and bond markets would no doubt get, it would be—in my opinion—a very short-sighted policy and have long-term negative effects such as an even weaker US dollar and the potential for much higher inflation.

I do not expect anything significant to change in the near-term. With the President and Congress at a stalemate, there is zero expectation for any meaningful reform that will propel our economy forward to higher growth until after the election. Europe is also in a wait and see mode, although they are waiting to see how the power struggle between the ECB and the German Central Bank will play out. Will the spendthrift nations get more money to spend or will the tightfisted Germans force meaningful political, fiscal, and labor reforms on their neighbors? We will all be watching as these key debates unfold.

Have we become like France as Brian Wesbury suggests? Yes if you look at current economic data, but I believe most Americans do not have a European mindset. It was not that long ago that our ancestors got on boats for a dangerous trip here because they did not think like their fellow citizens. So no, I do not think we are like France today, but we have drifted very close to the French economically.

LOOKING AHEAD

August is here. Vacation time is here. I suspect most people will not be as focused on the markets as they might otherwise be during the rest of the year. There are relatively few economic reports in the coming week, and earnings season is pretty much over. Trading volumes are likely to be down and any significant market moves may come from the few rather than the many.

There are significant issues remaining and big events on the way. The unrest in the Syria and possible escalation by Russia (sending Russian troops to the region), and the ever-present worries over Iran and Israel remain. Both the Republicans and Democrats will have their nominating conventions. The Republicans will go first from August 27th-30th followed the next week by the Democrats, and the campaign for president will swing into high gear. We will have a spate of major economic reports during the middle of the month as we always do, and we will finish August with the second estimate of the 2nd Quarter GDP.

The Dorsey Wright & Associates (DWA) current technical analysis shows US stocks and Bonds as the two strongest major asset classes followed by Currencies, International stocks, and Commodities. Within the US stock asset class, Middle capitalization stocks are favored, growth is favored over value, and equal-weighted indexes are favored over capitalization-weighted indexes. On a relative strength basis, Real Estate, Consumer Discretionary, Health Care, and Information Technology are the four strongest sectors on a relative strength basis. Energy, Telecom, and Materials remain the weakest. Within the Bond major asset category, US Treasuries and International bonds are favored.

The New York Stock Exchange Bullish Percent (NYSEBP) closed at 53.77 up from 53.32 (0.8%) from the previous week. Not a definitive move, but a positive one none-the-less. Bonds in general and municipal bonds specifically remain very overbought indicating that prices have gotten very expensive in relation to prices over the past ten weeks. I would not initiate new positions here.

Sincerely,

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.

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 first estimate of the 2^nd quarter real Gross Domestic Product (GDP) came in Friday morning at an extremely sluggish 1.5% annual rate.  The report, however, coupled with European Central Bank (ECB) President Mario Draghi’s announcement on Thursday that the ECB was “prepared to do whatever it takes” within the ECB’s mandate, propelled the Dow Jones Industrial Average (DJIA) to its highest close since May 4^th.

The DJIA added 400 points Thursday and Friday combined pushing the DJIA to a 253-point gain for the week (+2.0%).  The increase marked the fourth best weekly return for the Dow out of 30 trading weeks so far in 2012 and pushed the DJIA to a yearly gain of 7.0%.  The other major US indexes were all positive with the S&P 500 adding 1.7%, the Russell 2000 increasing 0.6%, and the NASDAQ rising 1.1%.  For the year, the S&P 500 is up 10.2%, the Russell 2000 is up 7.4%, and the NASDAQ is up 13.6%.

All but one of the major eleven economic sectors was positive last week.  Telecom, Industrials, and Financials led among sectors and beat the DJIA’s weekly gain.  Materials, Real Estate, and Utilities were the bottom three performing sectors with only Materials negative for the week.  For the year, Real Estate, Health Care, and Consumer Discretionary lead all sectors as well as outperforming the NASDAQ, the best performing major stock index in 2012.  Several other interesting observations are worth noting as July draws to an end.  First, every sector is positive for the year.  For much of the past four or five months at least one sector (either Energy or Utilities) was negative, but with the positive market action last week, this is no longer true.  Second, the spread between the best performing and worst performing sectors is relatively small (less than 14%).  I realize that there are 22 trading weeks left in the year, but at this point, I can say that this spread is about half of the lowest spread years (2010 and 2006) and significantly less than the roughly 39% yearly spread since 2003.

Europe rallied last week on the ECB president’s remarks, but as has been the case most of the year, continued to lag the US.  The MSCI (EAFE) index gained 1.2% for the week and is now up 1.0% for the year.  Looking back one year, most international country indexes are down with Europe and Asia hardest hit.    

The Euro gained nearly two cents (1.4%) to close Friday at $1.232 posting its first positive week in the past four.  In addition to Mr. Draghi’s comments, both German Chancellor Merkel and French President Hollande announced their firm support for the Euro on Friday.  The three announcements clearly moved the markets in a positive manner, but it remains to be seen if any of the three can deliver on a long-term solution for their region.

Europe’s immediate problem emerged last week from the bond markets.  Even with the pledge of a direct €100 million ($1.2 million) bailout for Spanish banks, the 10-year yield on Spanish government debt surged beyond 7.5% mid-week.  I have little doubt that it became clear to Mr. Draghi at the ECB that Spain was going to lose access to the private debt market making it impossible for Spain to service its growing debt.  This would pose severe problems for Spain and the entire European Union (EU).  This realization led to Mr. Draghi’s comments on Thursday and the German and French leaders’ supportive comments on Friday.  This verbal action had an immediate effect on bond markets pushing Spain’s rate down to 6.74%--high, but manageable for now.  US Treasury yields jumped as investor demand for the “safe-haven” US Treasuries diminished.  The 10-year yield finished Friday at 1.544% up from the previous week’s close at 1.459%.  The Barclays Aggregate Bond Index fell -0.3% for the week resulting in the first negative week of the past five.  For the year this broad US bond index is up 3.6%.  High Yield and Short-term International bonds were the best performing bond sectors last week while long-duration US Treasuries were the worst.

Commodities were a mixed bag last week.  The broad Dow Jones UBS Commodities Index fell by 1.9% last week led by weakness in coffee, sugar, natural gas, and agriculture.  The drought in the US continues to have an impact on future corn and livestock prices, but that increase has not been fully realized or found its way into the food supply chain—yet.  Gold jumped $40.00 (2.5%) last week to close Friday at $1622.70, the highest Friday close since June 1^st.  This move is at least partly explained by the ECB and the US Federal Reserve giving signals that they may engage in another round of quantitative easing (QE).  QE puts pressure on currencies and gold is the hedge against weakening currencies.  As I have said in the past, watch the price of gold to assess the strength of paper currencies and likelihood of further weakening of those currencies.  Oil has been trending upwards after falling the past month or two.  I believe a weaker US dollar and concerns about unrest in the Middle East helped push prices higher.  A barrel of WTI Oil closed Friday at $90.13 down 1.6% from the previous Friday close of $91.56.  This small drop follows two weeks where the price of oil gained $7.11 per barrel (+8.2%).

DOES IT ALL MAKE SENSE?

To say that there are headwinds, dark clouds on the horizon, or a blizzard of bad news about the economy is to admit that I have used a couple too many weather metaphors to describe what is without a doubt, a bad world economy.  The US GDP output shrank to a lousy 1.5%, Spain is on the verge of losing access to the capital markets, Greece may force private bondholders to take another €30 billion haircut to keep that country on its debt target, and unemployment is high and staying high.  So why has the market rallied in the face of such bad news?

The answer may be as simple as two words—low expectations.

Going into Friday’s GDP report, the Wall Street Journal reported that the consensus for the 2^nd quarter GDP growth rate was 1.2%, so when the rate came in at 1.5%, this news was actually better than expected and markets rallied.  This rally in the markets does not mean that the economy is suddenly going to do better, it means that investors had adjusted the valuation of stocks downward in anticipation of a 1.2% growth rate.  In hindsight, it turns out that investors over-corrected and stocks rallied to meet current growth expectations.  Additionally, because the report was so bad, the expectation that the Federal Reserve may start pumping more cash into the economy was increased helping push up stocks.

I would like to make a couple of other key points regarding the past few months.  First, headline news can be tough to deal with.  There is a lot of bad news out there.  The 24-hour news cycle means that all of us are bombarded with news around the clock.  I remember as a kid in the early to mid-‘70’s that you got your news in brief chunks each day.  The morning paper, 30 minutes of local news and 30 minutes of national news at dinnertime, and another 30 minutes of local news late night.  There was a lot of bad news out there, but it was not a constant drumbeat and it was easy to get away from the noise and focus on other things.  Maybe that was not the right answer either, but you cannot let all this negative economic news lead to poor investment decision making.

This leads me to my next point…having sound technical analysis to assist in basic investment decision making is invaluable.  As my regular readers know, the New York Stock Exchange Bullish Percent (NYSEBP), after falling 12 straight weeks from March 19^th thru June 8^th, this key barometer of market momentum began to rise.  Stock indexes did not turn immediately, but they did bottom just prior and have slowly made their way back with the DJIA adding some 1000 points.  It has been anything but a straight line, but by knowing that demand for stocks (NYSEBP rising) has made it easier to stay committed to stocks in the face of unrelenting bad economic news.

The US and global economies have tremendous challenges ahead of them.  The interplay between central banks, politicians, countries, government created organizations (like the International Monetary Fund), companies, and people is very complex and extraordinarily difficult to predict.  That is why I do not predict.  I look for trends and point them out when I see them occurring.  The research I receive from Dorsey Wright & Associates is central to my technical analysis, and I share my views based upon their research with you each week.

The efforts taken or will be taken by central bankers can only protect countries (and markets) for just so long.  Political leaders must correctly identify the problems they are confronted with, implement appropriate policies, and explain to their constituents why they are taking such actions, is the only chance I believe for long-term economic success.  Otherwise, we may be faced with extended periods of very slow growth, high unemployment, and consumer malaise. 

As long as the signals tell me that it makes sense to be engaged in the stock market, I will do my best to tell you where the opportunities are.  When the signals tell me to be somewhere else, you can be assured I will share my observations with you then as well.  It is tough for sure, but as we have seen by a 1.5% GDP growth for the quarter, Americans are tough in general and will do everything they can to grow their wealth and productivity.

LOOKING AHEAD

There are a series of important economic reports due out this coming week.  Personal Income and Outlays will be released Tuesday morning.  This report is always important because it gives insight into how much Americans are making and whether or not they are spending.  Wages have been essentially stagnate for some time now and may help explain why consumer spending is not picking up.  Personal income is expected in increase by 0.4% and spending is expected to increase by 0.1%.  The July ISM Manufacturing Index will come out Wednesday and is expected to show a slight increase in manufacturing activity over June’s report.  Thursday will have the weekly Initial Jobless Claims report (370,000) and Friday has July’s Unemployment Report.  This very important report is expected to show that jobs increased by 100,000 in July, but that the overall unemployment report will remain at 8.2%.
The Federal Reserve is meeting this week and will announce at 2:15 PM Wednesday their decision on interest rates—there is little chance that the Fed will make any change.  More importantly, investors will be looking for some signs from the Fed Chairman, Ben Bernanke, about the Fed’s intention to take action to stimulate the economy further.  This has very important implications for all markets, not just the stock market, because the introduction of fresh cash into the economy can have positive short-term effects
The Dorsey Wright & Associates (DWA) current technical analysis shows US stocks and Bonds as the two strongest major asset classes followed by Currencies, International stocks, and Commodities.  Within the US stock asset class, Middle capitalization stocks are favored, growth is favored over value, and equal-weighted indexes are favored over capitalization-weighted indexes.  On a relative strength basis, Real Estate, Consumer Discretionary, and Health Care are the strongest major economic sectors.  Energy, Telecom, and Materials are the weakest.  Within the Bond asset category, US Treasuries and International bonds are favored. 
The New York Stock Exchange Bullish Percent (NYSEBP) closed at 53.32 falling from 54.21 the previous week.  This is the first drop in seven weeks and I will watch closely to see if this move is marking a peak in this current move of the NYSEBP or just a brief pause.  Municipal bonds remain very overbought indicating that prices have gotten very expensive in relation to prices over the past ten weeks.  I would not initiate new positions here. 

Sincerely,

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.

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.