Tuesday, May 18, 2010

Weekly Market Update May 16, 2010

Last week started with a major recovery in markets around the world only to see concerns about the effectiveness of the European Union (EU) bailout package dominate the headlines and pull down markets.

For the week, the Dow Jones Industrial Average (DJIA) gained 240 points (+2.3%) closing at 10,620. The S&P 500 also gained 25 points (+2.2%) closing at 1136. This puts both of these major US indexes back into positive territory for the year with both the DJIA S&P 500 up about 1.8%.

The MSCI (EAFE) World gained 1.9% but is still down 10.3% for the year.

The Euro fell another 4 cents against the dollar closing at $1.2361 compared to $1.2760 from a week earlier. For the year, the Euro has lost nearly 14% to the dollar raising concerns that the Euro might weaken further.

Oil has continued to lose in the face of a strengthening dollar closing in New York on Friday at just under $71 per barrel, the lowest since early February. Gold continued to rise and reached an intraday record of $1249.70 an ounce on Friday before closing the day at $1227.80. Gold continues to rise as fears about a failing Euro remain.

Demand for US treasuries remained strong; however, the yield did rise over the week closing at 3.4571% up slightly from last week's 3.4199%. Corporate bonds continued to show some strength with small gains from the previous week.

The Verdict Is Not Looking Good

Headlines turned decidedly negative as the week wore on about the future of the Euro Zone.

Discussions have moved from can Greece be saved to can the Euro be saved. This change in dialogue began when reports surfaced about French President Sarkozy's argument with German Chancellor Merkel and his threat to leave the Euro if Germany did not agree to help fund the bailout package. Merkel has always been hesitant because the bailout is very unpopular in Germany; however she relented, the bailout package was agreed to, and Merkel came under immediate criticism by the German media. The voters also voiced their displeasure by voting against her party in a significant local election removing Merkel's majority in Germany's upper house.

I don't have the space to go into the details about European history and politics that are playing into this crisis, but I will say that the Euro Zone is under the greatest threat since its creation and points to its most fundamental flaw-an organization that has a common currency but not a common political foundation. The European Union was founded by a belief (and hope) that a common currency, and its accrued economic benefits, would be strong enough to pull politically dispersed countries together. The jury is still out.

For the US the stakes are high. The Euro Zone is a major economic trading partner with the United States. If Europe cannot pull itself together the fear is that our recovery is still fragile enough to be wounded by a weakened Europe. Additionally, the US is indirectly participating in the bailout by providing currency swaps with the European Central Bank (ECB)-this is a mechanism by which the ECB can meet demand for dollars by exchanging or swapping Euros for US dollars provided by the US Federal Reserve. Additionally, Greek Prime Minister Papandreou announced that Greece may take legal action against unnamed US investment banks for helping cause the Greek debt crisis. There is lots of uncertainty going into the week.

Finger Pointing

Besides the Greeks looking for fault with US investment banks, British Petroleum, Transocean Rig, and politicians all blamed each other for the continuing oil spill in the Gulf of Mexico.

The companies are posturing more for the certain litigation that will follow rather than addressing the issue at hand. I believe there is blame enough for everyone, but what needs to happen now is a 100% focus and effort to stop the oil leak. The impact on long-term supply is uncertain, but oil prices will continue to weaken as economic growth prospects are clouded by the problems in Europe and the weakening Euro.

US economic data for the week was generally good with retail sales gaining 0.4% and industrial output climbing 0.8% for April. Weekly jobs data was just ok, and news that the Federal deficit grew by some $82 billion in April continues to be worrisome.

Treasury Secretary Geitner is headed to China next week to discuss the yuan with the Chinese. While this issue is not of immediate importance for investors, it is worth noting. Most of the world, including the US, believes that China is depressing the value of the yuan making international imports to that mega market more expensive. Allowing the yuan to rise would contribute to higher prices here, but would certainly improve our trading position with China and thus our own economy. The Chinese government has made it very clear that they would only allow the yuan to rise if it suited their internal political interests and for now they do not.

Looking Ahead

Times like this demand discipline or in other words we must control our emotions when making investment decisions. This is where relative strength plays such a vital role. Relative strength does not predict, does not guarantee that you will always make money, and does not prefer one type of investment over another. Rather it helps focus investment decisions towards the strongest stocks, strongest sectors, and strongest broad asset categories based upon price movements. Decisions are made consistently on this analysis, not some "gut feeling."

Current relative strength analysis calls for under-weighting international equities. If you are going to have exposure here then the emphasis should be on non-developed markets over developed ones.

US equities remain favored and should be carried in portfolios. Small and mid cap stocks are preferred over large cap stocks; and the top sectors of real estate, consumer discretionary, information technology, materials, and financials are unchanged. For now, these investments have pulled back and are in more affordable trading ranges. However, if my analysis says it is time to exit these positions, I will certainly tell you.

Corporate Intermediate Bonds and International Bonds are still favored. Bonds continue provide a relatively safe haven for investors as long as interest rates do not begin to rise. If rates do rise, it will be imperative to adapt and I would expect to focus on short-term bonds or inflation-protected bonds.

Gold is near an all-time high but if it and silver continue to hold, I would expect to recommend adding precious metals to portfolios.

As always, if you have any specific questions on your portfolio or wish to talk to me, please do not hesitate to call.

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


Paul Merritt, MBA, AIF(R). CRPC(R) Principal NTrust Wealth Management

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.

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.

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