Tuesday, September 7, 2010

Markets rallied on signs that the US may be avoiding a second recession.

The Dow Jones Industrial Average (DJIA) gained 297 points (+2.9%)and the S&P 500 added 40 points(3.7%) to break a three week losing streak pushing the DJIA back into positive territory (0.19%)for the year. Positive, or should I say, less negative news on jobs and manufacturing gave investors confidence that the US is not sliding into a second recession. Strongest gains again were found in small and mid capitalization stocks while larger companies tried to keep up.

From a technical stand point, Real Estate, Telecommunications, and Utilities are the strongest sectors. From an absolute return basis, Real Estate, Financial, and Consumer Discretionary were the leaders last week while Utilities, Consumer Staples and Health Care were the weakest. For the year, Real Estate, Consumer Discretionary, and Industrials have provided the best returns. Information Technology, Energy, and Health Care have had the poorest year-to-date. Equal weighted indexes continue to outperform capitalization weighted indexes in the US. This is not surprising given the strength of the mid cap part of the markets.

The MSCI (EAFE) World Index posted a weekly gain of 4.0% continuing a recent trend of greater volatility than US indexes. For the year the MSCI (EAFE) World is down 6.1%. Australia, South Africa, and France were the leaders while Japan, Hong Kong and Taiwan were the worst performers last week. For the year, Thailand, Chile and Malaysia lead the way while Italy, Spain and France have been the laggards of the countries I follow. Emerging markets led over developed countries.

The Euro gained against the dollar closing at $1.2893 from last week's close of $1.2735. For the year the Euro is off 9.9% against the US dollar.

Gold gained another $14.20 (1%) closing the week at $1251.10. Gold continues to be a safe haven for investors against the uncertainty in world markets.

Oil pulled back slightly closing at $74.60 (-0.8%) from last week's close of $75.17. Oil has continued trading within a $10 range between $70 and $80 per barrel. I read one analyst who suggested that oil over $80 per barrel equates to $3.00 for a gallon of gasoline and when gas moves above $3.00 demand drops keeping oil below $80.

US treasuries pulled back on economic news this week. The yield on the 10-year note rose to 2.7133% up from last week's close of 2.6465%. The Friday to Friday close hides the real movement of yields as the 10-year yield fell below 2.5% early in the week. Not surprising, the longer-term treasuries were the worst performing sector of the bond market. Overall the bond market was down slightly for the week as investors gained greater confidence in the stock markets.

JOBS AND MANUFACTURING DATA BOOST CONFIDENCE

At the same time the overall unemployment rate increased from 9.5% to 9.6%, investors were encouraged by the creation of 67,000 private sector jobs in July. The general consensus is that this is a sign that the US economy is not going to slip into another recession. Overall, the job market shed another 114,000 jobs and notably the manufacturing sector shed 27,000 workers. While this may appear to be an encouraging sign in the private sector, one economist said that the US must create 300,000 jobs each month for four years just to regain the 8 million lost in the last recession.

Manufacturing improved last month as measured by the Institute for Supply Management's manufacturing index which rose to 56.3 from July's 55.5. Anything above 50 is considered to be expansionary. Simultaneously, China's manufacturing index also rose to 51.7 from July's 51.2. Investors see this as another sign that the economy is not going to fall off a cliff.

LOOKING AHEAD

Now that the summer holiday season is officially over, traders will be back to work in full force. They will be facing uncertainty, doubts about most things economic, and several trillion dollars are sitting on the sidelines as a result.

To quote Paul McCulley of Pacific Investment Management Company, "The market is schizophrenic. It would be foolish to have a tablepounding view short term on what stocks will do." This sentiment is reflected by the range bound nature of the markets. After breaking below the important support level on the S&P 500 of 1070 briefly, this index regained strength to close just above 1100-right in the middle of the current range. A move above 1140 will push through an intermediate point of resistance and be an encouraging sign. The DJIA's push above 10,400 is a very positive sign and momentum has turned positive for this index. Overall, my technical indicators, however, remain cautious. I continue to suggest maintaining an exposure to technically strong investments is prudent, but I would not overweight equities until a more sustainable trend is produced.

I prefer small and mid cap stocks over large cap. I do see renewed strength in the larger cap stocks and will watch this trend carefully.

Emerging markets remain preferred over industrialized countries with Thailand and Chile leading the way this year. Two powerhouses from last year, China and Brazil, have both posted negative returns this year and were also near the bottom last week of the countries I follow.

Bonds remain a solid investment. Last week's slightly negative returns reflect the return of higher interest rates. This trend must be watched carefully. Investors are still pouring money into bond funds. According to the Investment Company Institute, for the week ending August 25th, bond funds of all types attracted $5.9 billion while equity funds lost $4.6 billion. For the year, bond funds have taken in over $200 billion while equity funds lost $15 billion. I prefer intermediate maturity bonds and continue to believe that longer term bonds (especially US treasuries) are very expensive.

Last week's rally appears to be based more on investors coming back from double dip recession fears rather than on any solid economic data. The economy is inching along at an anemic pace and something needs to change. Looking over the last few months of the year, I have no doubt that markets will be heavily influenced by the political debate in the coming mid-term elections, and I will be vigilant to look for opportunities that may arise.

If you have any questions about the overall relative strength of your portfolio and would like my analysis, please do not hesitate to give me a call.

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.

Sincerely,

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.

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. The Dow Jones Industrial Average is based on the average performance of 30 large U.S. companies monitored by Dow Jones & Company. The Dow Jones Corporate Bond Index is comprised of 96 investment grade issues that are divided into the industrial, financial, and utility/telecom sectors. They are further divided by maturity with each of the sectors represented by 2, 5, 10 and 30-year maturities. The Morgan Stanley Capital International (MSCI) Europe, Australia and Far East (EAFE) Index is a broad-based index composed of non U.S. stocks traded on the major exchanges around the globe.

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