Monday, January 24, 2011

US stock markets finished the week mixed as the Dow Jones Industrial Average gained 84 points (+0.72%) to close at 11,872 while the S&P 500 lost 10 points (-0.76%) finishing at 1283, and the Russell 2000 lost 4.26%. The drop in the broader S&P 500 index and the small caps (Russell 2000 Index) marks a break in the recent general outperformance by mid and small cap stocks over larger cap stocks. There is no news that would point to a specific cause of these setbacks last week other than to say that the markets maybe taking a pause after very strong gains. Since the end of the 3rd quarter, 2010, and the close of markets on January 14th, the DJIA was up 9.26%, the S&P 500 up 13.32%, and the Russell 2000 up 19.44%. For the year, the DJIA is now up 2.54%, the S&P 500 is up 2.04%, and the Russell 2000 is down 1.34%.

The top three broad economic sectors last week were Utilities, Consumer Staples, and Real Estate while Materials, Information Technology, and Telecom were the bottom three performers. Of the 11 broad economic sectors I follow, only Utilities and Consumer Staples were positive on an absolute return basis. On a relative strength basis, Real Estate, Consumer Discretionary, and Information Technology continue to lead among the sectors.

The MSCI (EAFE) World Index lost a slight 0.02% for the week reflecting strength in developed Europe while emerging markets continued recent weakness. Last year's weakest countries, Spain and Italy are the best performers so far in 2011 while Indonesia, South Africa, and India have all pulled back significantly. Concerns over a weak US dollar are driving inflation worries in emerging markets and countries may be forced to tighten local monetary policy to temper inflationary concerns dampening economic growth. China has raised lending reserves and the Central Bank of Brazil just raised their key interest rate by 0.50% to 11.25%. Rising food prices in particular are hurting many emerging markets right now. I will be evaluating emerging market positions closely in the coming weeks.

The Euro continued its climb against the US dollar as European debt fears continue to subside. The Euro closed Friday in New York at $1.3615 up another $0.025 pushing the Euro to its highest levels since late October of last year. Part of the recent push has been the added buying by investors who had "shorted" the Euro. Investors sold, or "shorted" the Euro on expectations that the currency would continue to fall. In the face of growing strength, these investors must now buy Euros to close out their positions adding additional momentum behind the Euro's gains.

Commodities were mixed last week. Gold added to the previous week's losses posting a drop of $19.90 (-1.46%) to close late Friday at $1341.00. For the year, gold is now down 5.54%. Gold's relationship with the Euro is telling as the currency gains strength (considered a signal of investors' willingness to assume greater risk); gold and other precious metals lose strength. Oil also pulled back on news of strong supply inventories. Oil (West Texas Intermediate) lost $2.55 (-2.78%) from the previous week's close of $91.22. Food and textile commodities continued to move higher creating concerns over future inflation in many goods.

The 10-year treasury yield rose last week closing Friday at 3.4081% up from the previous week's close of 3.3328%. The Federal Reserve helped stem further increases in the yields by making Treasury bond purchases late in the week. The markets will be watching the tenor of remarks coming from this week's Fed's meeting (the first in 2011), and investors will also be watching how the sale of $99 billion in new Treasuries goes. Corporations issued $10 billion of new bonds adding to supplies in the bond markets, and reports by Moody's and Standard and Poors indicating that the US's AAA bond rating may be at risk if Washington does not get spending under control will continue to weigh on investor's minds.


We are in the midst of earnings season where US companies are reporting their 4th quarter, 2010, earnings and making announcements of their views regarding 2011. So far the reports have been coming in pretty well and I would expect this to continue. GE had great numbers and helped propel the DJIA last week, but the real news came from Apple and Google announcing major management shakeups. Apple's Steve Jobs has been forced to take another medical leave of absence while Google announced the departure of its current CEO. Both moves raised investor fears and contributed to the drop in both stocks, especially Apple. Apple is the single most widely held stock among institutional investors while Google is the seventh.


The first key indicator I look at on a day-to-day basis is the New York Stock Exchange Bullish Percent (NYSEBP). The NYSEBP is a statistic that gives insight into whether the US stock market is currently gaining strength, losing strength, and how much risk is built in to the market. I have mentioned the NYSEBP before, but I will spend a little more time discussing just how this indicator works.

The NYSEBP looks at the point and figure chart of every stock on the New York Stock Exchange and decides if it is in a buy mode or sell mode (for further explanation of point and figure charting you can find good explanations online or in Tom Dorsey's book, Point & Figure Charting, Third Edition). All buys are added up and divided by the total number of stocks to arrive at a percentage. If the percentage is below 30% the market is considered oversold, and if the percentage is over 70% the market is considered overbought. Additionally, if the momentum of that percentage is upwards, then the market is considered to be on offense and more people are buying stocks than selling. Likewise, if the NYSEBP is losing momentum, than more sellers are in the market and caution should be exercised. The old adage of "a rising tide lifts all boats," describes the value of the NYSEBP. If markets are rising, it is generally possible to make money in stocks, and if the markets are falling, it becomes much more difficult.

Presently, the NYSEBP is at 79.36 with positive momentum. The NYSEBP has been over 70% since October, 18, 2010. The average time the NYSEBP has been over 70% since 1958 is 95 days. We are now at 97 days. While the NYSEBP cannot predict when the indicator will pull back (the longest period was 285 days from June 4, 2003 until March 16, 2004); it can certainly tell us that there is greater risk of a market pause or correction today, and that the tide is certainly high. I will be watching very closely for any reversal in momentum in the NYSEBP and will pass that information on when I do see that.

Looking Ahead

Both the small and mid capitalization segments of the markets were down last week. Their point and figure charts turned to negative momentum and will require further review. Emerging market momentum has also turned negative. As I noted earlier, it not especially surprising after each of these market segments have enjoyed great strength since the fall of 2010; however, the caution lights are flashing.

Bonds continue to be flat and worries of inflation are weighing on bond investors. Heavy supply of bonds of all types may also contribute to weakness in bond prices (raising yields). I believe that for 2011 bond investors can expect more traditional bond-like returns and not the double digit gains seen since we came out of the financial crisis of 2008.

Commodities remain volatile and gold is reaching its long-term support at $1340. If gold breaks below $1340, positions will need to be reevaluated. Oil has pulled back to the middle of its 10-week trading range and has support at $85 per barrel. Other commodities are showing strong price appreciation and are contributing to the underlying inflation worries spreading throughout the world. The weakening US dollar is also helping to raise commodity prices and stoking inflation fears abroad.

The less sensitive indicators found in the Dynamic Asset Level Indicators (DALI) still show US and International stocks to be favored, Emerging Markets favored over Developed, equal-weighted indexes favored over capitalization-weighted, mid and small cap over large cap, and growth over value. Because the DALI is less sensitive than the markets in general, changes, when they occur, are significant.

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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