Thursday, March 22, 2012

After four or five weeks of generally flat performance, US stocks posted their strongest gains yet in 2012 on encouraging economic reports regarding jobs, retail, and manufacturing. Only a somewhat negative report on consumer confidence on Friday took some steam out of the markets this week.

For the week, the Dow Jones Industrial Average (DJIA) gained 311 points (2.40%), the S&P 500 gained 38 points (2.43%), and the tech-heavy NASDAQ added 13 points (2.24%). The Russell 2000 slightly lagged the other key indexes gaining 1.61% for the week. For the year the DJIA is up 8.31%, the S&P 500 is up 11.65%, the Russell 2000 is up 12.05%, and the NASDAQ is up an impressive 17.58%.

Financials, Industrials, Real Estate, and Information Technology all outperformed the S&P 500 this past week with Financials leading all sectors with a 5% gain. Banks have been especially strong following the Federal Reserve's release of findings from rigorous stress tests designed to identify potential weaknesses among the major banks. Most banks did well and this has boosted the confidence of investors in this beaten down economic sector. The more defensive sectors like Telecom and Utilities have struggled so far in 2012 as investors have moved into the more cyclical economic sectors like Financials, Materials, and Industrials. For the year Information Technology, Financials, and Consumer Discretionary are the best performing sectors while Utilities, Consumer Staples, and Telecom are the worst. However, only the Utilities sector is down slightly at this point in 2012.

International stock indexes posted good, but more modest returns for the week with the European-heavy MSCI EAFE index gaining 0.85%. The Americas and Developed Markets were the best performing broad sectors within the International category while Emerging Markets and Asia/Pacific lagged. Germany, the Netherlands, and Sweden were the best performing countries of those I follow last week while Egypt, Malaysia, and India were the worst. For the year Emerging Markets is the best performing of the broad International sectors with Asia/Pacific, Developed Markets, and the Americas sectors closely bunched together and posting nice gains. Spain and Indonesia are lagging most International country performances with low single-digit gains.

The Dow Jones UBS Commodity index gained 0.57% ending a two-week slide, however, gold continued its fall with another 3.25% drop and WTI oil fell a slight 0.32%. Natural gas again posted strong gains to lead most commodity sectors along with gains in Sugar, Grains, and Agriculture. Cocoa and Precious Metals led among commodity sectors that were down for the week. Gold prices failed to rally on a weaker US dollar after the Wall Street Journal reported that the Indian Finance Minister proposed a doubling of import tariffs on gold for that country. India is the largest buyer of gold in the world and any reduction of demand there would be expected to hurt gold prices in general. Although oil prices ended the week basically flat, oil sold off Thursday after a news story said the US and Great Britain had agreed to a release of oil from the Strategic Petroleum Reserve to help off-set rising gasoline prices. This report turned out to be incorrect and oil prices rebounded on Friday to close at $107.06 per barrel.

The US dollar reversed course last week and posted its first negative return of the past three weeks. The US dollar fell even as interest rates on longer-maturity US Treasuries surged and the US economic outlook continues to improve. For the year, the US dollar is flat (the US dollar index is down 0.49%) against most major currencies. The one exception is the Japanese Yen which is up 8.32% against the US dollar. I have said before that I rarely trade in currencies, but I certainly pay attention to the general strength/weakness of the US dollar because of the important ramifications it has on stock and bond valuations.

Bond markets saw sizeable sell-offs of US Treasuries last week as the 10-year and 30-year notes saw their yields reach levels not seen since the end of October 2011. The US 10-year closed Friday at 2.294% and the US 30-year closed at 3.407%. The Barclays Aggregate US Bond index fell 0.73% last week to post the worst one-week return in over a year. I believe the move away from bonds can be attributed to the overall outlook for the US economy, reduced expectations that the Federal Reserve will rollout another round of quantitative easing, and increasing investor appetite for risk. The interest rate on the German 10-year Bund also rose sharply. Not surprisingly, long-duration US Treasuries and Corporates were the worst performing bond sectors last week and are also the worst performing for the year. Preferreds, floating-rates, and short-duration bonds were the best performing bond sectors last week. Overall, the Barclays Aggregate US Bond index is down 0.04% for the year.

SOME GENERAL THOUGHTS

I would like to begin this section of my Weekly Update saying how nice it is to be talking about something other than Europe. I do not apologize for the time I have spent addressing the issues in Europe because I believe their challenges do and will impact us here in the US both in immediate economic terms but also as a preview of what could happen here in the US if the federal government continues to spend far outside its means. But for now I happily discuss some other topics.

I spent this past Friday attending a seminar hosted by First Trust Advisors in Chicago. The speakers offered a variety of thoughts about the US and global economy and I would like to share some of their views. Before I begin let me say that I am not endorsing any specific opinion and forward-looking statements are subject to change at any time:

Overall thesis: the US economy is the most resilient in the world. US workers and corporations go about each day trying to be better and strive for economic prosperity. This effort translates into long-term growth that can overcome the headwinds found by excessive government spending, above average unemployment, and challenges from abroad.

Inflation: is present but not of the magnitude to cause immediate concern. The Federal Reserve will be forced to raise interest rates next year, but this is a good thing because it indicates a strengthening economy here at home. Fears that the increase in the money supply generated by the Fed's quantitative easing programs would lead to high inflation has not materialized because banks have taken much of the money created by the Fed and put it right back on deposit with the Fed. The overall circulation of money is not growing at the same rate as money creation keeping inflation in check for now.

Volatility: the strong start to the markets in 2012 has helped reduce volatility by driving many of the short-sellers (those who borrow stock, sell that stock in anticipation of a decline, and purchase it back at a later date thereby profiting on the decline) out of the markets. Their absence has helped to limit many of the big swings seen during the last half of 2011.

Europe: is not a banking problem but a government problem. Governments throughout Europe have been fostering an unsustainable "lifestyle" and we are now witnessing the end of the European welfare state. It will take years to play out, but the pendulum has begun to swing back towards less government spending. Governments will have no choice but to curb spending because the capital markets simply will not continue to lend money to profligate countries as they have done over the past 50 years.

Technology: the pace of technological innovation will continue to grow at an ever-increasing pace. New inventions result in even more inventions. The US is the world's leader in technological research and innovation. Not surprising then, the US also leads the world in highly skilled manufacturing capabilities and our workers are the most productive anywhere. This global leadership will continue to grow over the decades to come.

Demographics: pay attention to this important factor. The work forces of Japan, China, Korea, and Western Europe will be noticeably smaller by 2050 than they were at the start of this century. India and the US by contrast will grow substantially.

LOOKING AHEAD

Following the strong performance of US equity markets this past week, it will be interesting to see if markets will maintain that momentum. Economic data indicates that the US economy is stronger than expected (or it is less bad than expected), and may hold current gains. However, I believe that investors must carefully monitor their investments for any signs of weakness. Thus the technical indicators I follow from Dorsey Wright & Associates (DWA) help to identify early trends or confirm existing ones.

The relative strength analysis from DWA ranks five major asset categories from strongest to weakest. As of the date of this Update US stocks is the strongest category followed by Commodities, Bonds, International stocks, and Currencies. The International stocks category advanced out of the bottom position early last week and moved to fourth. The International stocks category has also shown the most improvement of any category in 2012. US stocks retain a very sizeable lead over the other categories with the bottom four clustered closely together.

Within the US stock category, DWA analysis ranks mid-capitalization stocks above large and small capitalization stocks. Growth stocks are favored over value stocks, and equal-weighted indexes are favored over capitalization-weighted indexes by DWA. I believe that it is important to pay attention to the major economic sectors when investing. DWA currently ranks the sectors on a relative strength basis as follows (starting with the strongest): Consumer Discretionary, Information Technology, Financials, Real Estate, Energy, Health, Materials, Consumer Staples, Industrials, Utilities, and Telecom. Investors seeking higher dividend income generally own the Utilities and Telecom sectors and these sectors are currently providing that income.

Within the Commodity asset category Energy and Precious Metals are the favored sectors. The current weakness of gold and silver may cause a change in this current ranking; however, it is too early to tell. Treasuries and International Inflation Protection Notes are the favored

sectors within the bond category; however, I believe the recent rise in interest rates is likely to challenge the relative strength leadership of Treasuries going forward. In terms of performance, preferreds, high-yield, and floating-rate bonds have been leading many other bond sectors as investors appear willing to take on more risk. Rising interest rates must be watched carefully because bond values will fall correspondingly. The newly promoted International stock asset category places the Developed Market sector on top with emphasis on the US. Outside of the US, the Emerging Market sector has shown the best performance in 2012. Finally, within the Currency category, DWA places the Australian dollar, the Brazilian Real, and the South African Rand as the top relative strength currencies.

Housing will be the focus of many economic reports coming from the Federal government this week. February Housing Starts will be released Tuesday morning. Consensus is looking for 700,000 new starts just slightly better than the 699,000 of the previous month. February Existing Home Sales will be released on Wednesday morning with consensus anticipating an increase of the annual sales rate from January's 4.57 million to 4.61 million. New Home Sales for February will be released on Friday morning. Consensus is expecting the annual rate to increase from January's level of 321,000 to an annualized rate of 325,000. Initial Jobless Claims will be published Thursday morning as it is every week. The consensus is anticipating a slight increase from 351,000 new claims so 352,000. Each of these reports is important to investors because they will confirm or challenge the assumptions by investors that the US economy is gaining strength.

The NYCE US Dollar Index is a measure that calculates the value of the US dollar through a basket of six currencies, the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona, and the Swiss franc. The Euro is the predominant currency making up about 57% of the basket.

Currencies and futures generallyare volatile and are not suitable for all investors. Investment in foreign exchange related products is subject to many factors that contribute to or increase volatility, such as national debt levels and trade deficits, changes in domestic and foreign interest rates, and investors' expectations concerning interest rates, currency exchange rates and global or regional political, economic or financial events and situations.

Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, including international economic, political and regulatory developments.

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 Dow Jones UBS Commodities Index is composed of futures contracts on physical commodities. This index aims to provide a broadly diversified representation of commodity markets as an asset class. The index represents 19 commodities which are weighted to account for economic significance and market liquidity. This index cannot be traded directly. 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.

TIPS are U.S. government securities designed to protect investors and the future value of their fixed-income investments from the adverse effects of inflation. Using the Consumer Price Index (CPI) as a guide, the value of the bond's principal is adjusted upward to keep pace with inflation. Increase in real interest rates can cause the price of inflation-protected debt securities to decrease. Interest payments on inflation-protected debt securities can be unpredictable.

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.

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.

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, this is a market capitalization weighted index, meaning the largest companies in the S&P 500 have a greater weighting than smaller companies. The S&P 500 Equal Weighted Index is determined by giving each of the 500 stocks in the index the same weighting in the index. 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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