Monday, January 3, 2011

Happy 2011!

US equity markets closed the year with a strong December and a good year overall. The Dow Jones Industrial Average (DJIA) ended 2010 at 11,578.72 for a gain of 1151 points (+11.03%) with 487 of those points coming in the month of December alone. The S&P 500 had similar gains closing the year up 143 points at 1257.84 (+12.80%). December's gain of 77 points accounted for half of the S&P 500's gains for the year.

The top three broad economic sectors on an absolute return basis (not accounting for dividends) were Consumer Discretionary, Industrials, and Real Estate while Utilities, Health Care and Consumer Staples showed the smallest gains. Going into 2011 the strongest three sectors on a relative strength basis are Real Estate, Consumer Discretionary, and Materials. The weakest are Utilities, Health Care, and Financials; however, Financials and Health Care are showing some recent improvement among the sectors on a relative strength basis.

The MSCI (EAFE) World Index gained 8.02% for the year and 4.90% in December. International markets have recovered as European markets gained strength as yet another round of debt worries were set aside by investors. For the year, Indonesia, Thailand, and Chile were the top performers of the countries I follow. Not surprising, Spain, Italy, and France underperformed. China posted very pedestrian turns in 2010 as concerns mounted over governmental tightening and inflation worries.

The Euro closed at $1.3369 falling $0.95 (-6.61%) against the US dollar in 2010. The Euro was under stress most of the year as problems surfaced in Greece, Ireland, Portugal, Italy and Spain over sovereign (government) debt sending investors into the US dollar for safety. Over the New Year's holiday weekend the state heads of France (Sarkozy) and Germany (Merkel) publicly pronounced their full support of the Euro and tied their respective country's future to the success of the Euro. As I noted in recent updates, the Germans and other strong European countries must preserve the Euro for their own self-interests so I am not surprised by these endorsements.

Commodities posted strong gains across the board. Gold gained 29.7% closing the year at $1421.40 per troy ounce over uncertainties surrounding paper currencies and inflation worries. Oil ended the year at $91.22 per barrel and OPEC announced earlier in December that they would not increase production and were comfortable with $100 per barrel oil prices. While still not favored over US and International stocks on a relative strength basis, commodities have made a very strong move in the last six months.

The 10-year treasury finished the year at 3.2877% down from 2009's close of 3.835% allowing US treasuries to post solid gains in 2010. The 10-year US treasury yield bottomed on October 6th at 2.393% and climbed steadily until December 15th peaking at 3.517% before staging a rally the last two weeks of the year. The broad-based Barclays Aggregate Bond Index gained 6.53% for the year as all bond categories posted solid gains despite some year-end weakness. US high yield and emerging market bonds posted the best gains for the year while municipal bonds posted the smallest.


One of my favorite pastimes over the holiday season is reading all of the prognostications for the upcoming year. This year was no different. The airways and internet is inundated with countless pundits making their calls for 2011 and I have said many times that I do not make predictions because it is guesswork at best. I will share with you some general trends that I have read in case you are curious. Then consensus is that 2011 will be another solid year for the markets (low double digit gains much like this year) with US markets out performing international markets. Stocks will out perform bonds. Unemployment will improve but remain stubbornly high, the housing market could take another dip, commodities will continue to do well, and the small investor will return to buying stocks.

Prognostications are interesting, but I will continue to rely on relative strength analysis to direct my investment recommendations. As you know I have said consistently in 2010 that small and mid-capitalization stocks were outperforming and the Russell 2000 index (a small cap index) was up 26% compared to the DJIA which was up 11%. I have also consistently been saying that equal-weighted indexes were preferred over capitalization-weighted indexes. In 2010 the S&P 500 equalweighted index was up 19.8% compared to the S&P 500 cap-weighted index which was up 12.8%. So going into 2011 I will focus on what my technical analysis is telling me and that is:

· Small and mid-capitalization stocks are preferred over large-cap. · Growth is preferred over value investing. · Equal-weighted indexes are preferred over capitalizationweighted indexes. · US and International stocks are preferred over Bonds, Currencies, Commodities, and Cash. Commodities, however, are making a strong positive move and certainly be considered for portfolios if not already included. · Emerging markets are preferred over developed markets · Intermediate-term corporate bonds and emerging market bonds are preferred among bonds. · Real Estate, Consumer Discretionary, and Materials are the favored broad sectors.

Looking Ahead

I have no doubt that 2011 will be full of twists and turns and the unexpected. We live in interesting times, but I will let the pundits try and figure out where we will end 2011. While I will not make predictions, I will continue to make my recommendations on what is actually taking place. Relative strength analysis is not fool proof and I am the first to point out weaknesses such as when the markets were range-bound earlier in the year. But once trends take hold, relative strength analysis makes sure the strongest opportunities are identified and where investment decisions can be directed. I will continue to strive to provide you with up-to-date analysis of current economic news and provide you with sensible commentary.

I trust each of you had a wonderful holiday season and that you had a chance to share the season with family and friends. Stacy, Lisa, and our families were treated to the third greatest snowfall in Virginia Beach history and a very rare white Christmas. We came away with many adventures and stories. Travel was treacherous since the primary means of snow removal in Virginia Beach is sunshine and 33 degrees.

All of us at NTrust Wealth Management wish each of you a healthy and prosperous 2011.

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.

Emerging market investments involve higher risks than investments from developed countries and also 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.

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.

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. The Russell 2000 Index is comprised of the 2000 smallest companies within the Russell 3000 Index, which is made up of the 3000 biggest companies in the US.

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