For the week, the Dow Jones Industrial Average (DJIA) lost 457 points (-4.51%) closing at 9686 and the S&P 500 lost 5.03% closing at 1023. Both indexes have broken below their initial support levels of 9800 and 1050 respectively. The next support level for the DJIA is 9300 and 1000 for the S&P 500. For the year the DJIA is now down 7.11% and the S&P 500 is down 8.30%.
The MSCI (EAFE) World lost 2.51% and is now down 14.76% for the year. The Euro posted a weekly gain of 1.5% closing at $1.2560 up from last Friday's close of $1.2377. The better relative strength performance of the MSCI (EAFE) and the gain in the Euro was the result of a series of positive news stories from the Euro Zone.
Oil fell sharply for the week closing at $71.20 for an 8% to 9% drop from last week reflecting fears that global economic sluggishness will curtail demand. Gold also fell dramatically dropping slightly below the psychologically important $1200 per ounce before closing on Friday at $1207.70. This 3.8% drop illustrates what I refer to as the "schizophrenic" nature of investor sentiment about the yellow metal recently. One week gold is a safe haven, the next a speculative investment, and so the story goes. With better news coming from Europe and the stabilizing of the Euro, gold lost much of its appeal to European investors as a safe haven and demand fell--for now. Gold remains a strong technical asset and above its long-term support of around $1000 per ounce. Base metals fell again following the less optimistic economic news particularly from China.
Prices of US treasuries gained and pushed the 10-year rate down below 3% closing Friday at 2.9770%. It goes without saying that bond investors see little upside to the US economy in the near term and do not expect the Federal Reserve to raise rates anytime soon. Corporate bonds continued to show strength and most bond categories gained in value during the week.
LITTLE GOOD NEWS ON THE ECONOMIC FRONT
Last week I addressed the many negative data points coming out about the markets including low home sales, European debt concerns, and a Fed report that indicated that the economy was slowing.
On Friday the final blow came in the news of a very lackluster jobs report showing the first overall monthly loss this year. While most of the losses were attributed to the elimination of temporary census jobs, the real damage came from an increase of just 83,000 private-sector jobs. Overall the unemployment rate fell from 9.7% to 9.5% as another 652,000 Americans quit their active job searching. For May and June the number of people no longer looking is greater than 1 million. The concern now is what happens when these discouraged workers attempt to reenter the job force when job creation does begin. Additionally the average number of hours worked and wages also fell.
One bright spot is the expectation that inflation is not a problem now or in the foreseeable future. Consensus is that the Fed will not raise interest rates in the near future making investments in bonds at this point still attractive.
I remain concerned about the impact of large state government deficits. California, New York, New Jersey, Michigan and Illinois are all locked in political combat as fiscal policies are debated. What is certain is that each of these states is broke and only the infusion of federal dollars will keep these states from major financial reforms. These reforms most certainly would require significant spending cuts which in turn would be another drag on the overall economy.
NEWS FROM EUROPE IMPROVED
A series of stories coming from Europe have settled those markets for now and helped the Euro gain against the US dollar. Most significantly, Spain's debt issuance went well. The country had no problems raising €7.5 billion ($9.4 million) of three-year notes indicating that the private sector was still prepared to lend to Spain. Also the Greek finance minister reported that his country was ahead of pace to dramatically cut its debt this year, and the French finance minister said that both French and European banks are in good shape based upon recent stress tests.
European Central Bank President Trichet spoke out over the weekend saying that the European governments were on track with fiscal policies aimed at limiting deficits and that growth would return once budgets were under control. This tended to hurt markets more than it helped as all major European indexes were down on Monday, July 5th, by some 0.3% to 0.5%.
My generally cautious outlook on markets remains in place and I believe that it is better to take a more conservative position and give up opportunity rather than risking the loss of capital at this time.
There may be rallies along the way given the selling pressure the markets have been under recently; and if headlines are any indication, the contrarian view would be to buy now. I prefer to wait until the market signals a sustained trend. Additionally, I believe there remain very substantive economic issues such as the impact of all the legislation coming out of Washington that must be worked through and that will take time. Additionally, the housing and employment data must get better. A jobless recovery will not sustain the markets, nor will falling housing prices continually pushed down by the vast number of foreclosures and short sales. However, by continually scanning all the market sectors using relative strength analysis, I will be able to keep you apprised of where positive trends are emerging.
The New York Stock Exchange Bullish Percent (NYSEBP) closed on Friday at 38.60% meaning that only about one in three stocks is in a point and figure buy status. This was a drop from last Friday's close of 48.62%. Anything below 30% is considered oversold and the markets are clearly in a negative trend. All short and intermediate-term indicators that I follow are all negative and all broad market indicators were down as well. The only consistent gains were found in the bond markets as corporates and treasuries continued to do well.
A key report due out on Tuesday is the Institutional Supply Management's (ISM) non-manufacturing job index. This index focuses on the substantial service sector employment area. The index stands at 55.4 and anything greater than 50 will show increasing growth in the service sector; however, the rate of growth slows as the number gets closer to 50. Below 50 indicates negative job growth in this all important sector.
While every sector was down last week, several unfavored sectors have shown better relative strength than others: Utilities and Telecom. These sectors may simply be benefiting from defensive rotation, but outperform they did. Investors may also be turning to these sectors to take advantage of the dividends typically paid by utilities and telecom companies. International markets also outperformed, but one week does not make a trend.
I continue to hold my opinion that while treasuries are very strong, they are very expensive at this point in time and new positions should be entered into thoughtfully. Corporate intermediate-term bonds remain favored.
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.
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)
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.