Friday, April 20, 2012

Markets went a bit wobbly this past week as fears resurfaced in Europe over Spain's rising interest rates, China's slowing economy, and a US jobless report that took some of the air out of bulls' sails.

All major US indexes posted their worst weekly returns out of the 15 weeks of trading so far in 2012. The Dow Jones Industrial Average (DJIA) lost 211 points (-1.61%), the S&P 500 fell 28 points (-1.99%), the volatile Russell 2000 pulled back 2.68%, and the recently strong NASDAQ posted a 2.25% loss. So far in April the DJIA is down 2.74%, the S&P 500 is down 2.71%, the Russell 2000 of off 4.10%, and the NASDAQ is down 2.60%. The year is still reflecting an overall improvement for stocks. The DJIA is up 5.17%, the S&P 500 is up 8.96%, the Russell 2000 is up 7.47%, and the NASDAQ is up a strong 15.59%.

For the second week in a row, every major US economic sector saw declines last week. The Materials sector led along with Real Estate, Consumer Staples, and Consumer Discretionary. Each of the top four sectors outperformed the DJIA. Health Care, Energy, and Financials were the worst performing sectors and each lost more than 2% for the week. Information Technology, Consumer Discretionary, and Financials are the best performing sectors for the year and all are posting double-digit gains. Utilities is the worst sector and is down just over 4% for the year followed by Energy and Telecom. Energy and Telecom are slightly negative for the year now. The banking sector was particularly hard hit last week on disappointing earnings by JP Morgan and Wells Fargo.

International stocks, while down, were not down as much as US equities. The MSCI EAFE index fell 1.20% last week. So far in April the index is down 4.21% and is up about the same as the DJIA for the year. The Asia/Pacific sector and the Emerging Market sector were the best performing international sectors last week losing 1.27% and 1.75% respectively. For the year the Emerging Market sector is the best performing among the broad international sectors gaining 11.73% followed by the Asia/Pacific sector (+9.99%), and the Americas sector (+8.69%). The Developed Markets sector is the weakest but has posted a yearly gain of 7.77%. The news coming from Europe has been disconcerting for investors as they have been watching the yields on Spanish and Italian bonds rise. The greatest fear of international investors over the past year or two has been for the debt crisis to move from the tiny Greek economy into one of the big countries and for now it looks like all eyes are on Spain. Although not as splashy, the slowdown in China's 1st quarter GDP results (8.1% vs. 8.9% in the 4th quarter 2011) affected markets. Investors believe that China's GDP is a barometer of the over health of the global economy and any signs of slowing raises concerns.

The Dow Jones UBS Commodity index posted its fourth weekly decline in a row losing 1.55%. During this four week run, the DJ UBS Commodity index is down 4.6%. For the year, this broad commodity index is down 0.87%. Gold rebounded last week and added $30.10 (1.85%) per ounce to close Friday at $1660.20, but this masks a 1.2% decline on Friday as investors' fears of a global slowdown pushed concerns of currency inflation aside. WTI Oil lost $0.48 (-0.46%) per barrel to close Friday at $102.83. Analysts are suggesting that the recent pullback in oil prices reflects the general belief that the global economy is slowing and reducing demand.

The Euro stopped its decline against the US dollar gaining $0.002 (0.15%), but worries about Spain, interest rates, and the overall Euro Zone economy will, in my opinion, continue to keep pressure on the Euro. There was little movement in general last week among currencies keeping with this broader theme for 2012.

Bond markets continued to rally as US interest rates have fallen over the past several weeks. The Barclays US Aggregate Bond Index was up 0.36% for the week, and is now up 1.18% for the year. The 10-year US Treasury interest rate fell below 2% closing Friday at 1.987%. The 30-year interest rate also fell to 3.134%. Both moves were sizeable and reflect, in my view, reduced confidence in the overall economy. The real concern remains Europe. The Spanish 10-year bond closed just below 6% and this surge in interest rates is disturbing. Equally concerning is the increased borrowing Spanish banks are doing with the ECB. As private investors shy away from Spain, banks there will have greater difficulty in meeting their cash needs. Long-duration bonds were the best performing bond sectors last week while preferreds, floating rates, and short-duration were the weakest. For the year, preferreds international inflation protection, and high yield are the best performing bond sectors while extended duration bond sectors the worst.

MY THREE SIGNALS

I said two weeks ago (April 1, 2012 Weekly Update) that there were three major factors I am watching to gauge the overall health/direction of the markets. Interest rates was one factor. I believe, as I said in that Update, that rising interest rates (up to a point) are a sign of growth and economic expansion and falling rates of contraction. The 10 and 30-year US Treasuries spiked on March 20th and have gone down each week since signaling possible economic weakness. I will caution you about a misconception that I think many investors have, and that is they believe interest rates move in an orderly up or down direction over time. This may be true with the Federal Reserve's overnight lending rate, but the markets determine all other rates and those rates can move swiftly and dramatically. Interest rates in Europe are especially important because whole economies could possibly shut down if interest rates get completely out of control. The European Central Bank soothed the system in December with the Long-term refinancing operation (LTRO), but as fears mount, banks, particularly Spanish banks are becoming more and more dependent on the ECB for cash, not investors. The interest rate gauge is suggesting general economic weakness at this time.

A second factor I believe will weigh on the markets here in the US is Europe. Part of the European story is the interest rate challenge that I have already discussed, but the real issue with Europe is growth and the probability for growth. For now, Europe is slipping into a shallow recession and that is going to have some impact on the global markets. The upcoming elections, unemployment rates, and interest rates will all influence the ability of the Euro Zone going forward. Currently I believe the Euro Zone is in a slight recession and will have a negative impact on global growth for now.

The final factor I discussed was the data analysis from Dorsey Wright & Associates (DWA). For those of you who are not familiar with DWA I prefer to quote the great New York Yankee catcher, Yogi Berra, who said, "you can learn a lot by observing." This is what DWA is all about-watching the market and using a couple of basic concepts like Point and Figure charting, relative strength analysis to develop indicators about the current state of the markets. The New York Stock Exchange Bullish Percent (NYSEBP) is one of the most important tools I follow from DWA. The NYSEBP has risen since early December 2011, but this past week the NYSEBP reversed indicating possible weakness in the market. Alone, this reversal does not suggest selling securities; however, it does create a cautionary tone about the market.

All three issues that I am watching are flashing yellow today. Therefore, I am taking a cautionary view of the markets for the near term.

LOOKING AHEAD

More of the same. Nothing to get excited about, but nothing to be especially fearful of either. To say the economy feels blah pretty much sums it up, and the economic data due out this week will, in my opinion, continue along this direction.

Key US economic data releases gets started Monday morning with March Retail Sales which are expected to fall compared to February's sales. If retail sales surprise, I believe the markets to react favorably. Housing Starts and Industrial Production numbers are due out Tuesday morning. The housing market is of particular importance and starts are expected to increase marginally. Initial Jobless Claims, Existing Home Sales, and the Philadelphia Fed Survey will all be released Thursday morning. The initial jobless number will be closely watched by investors after last week's unexpected spike in jobless claims raised doubts about the durability of the current modest economic recovery. Consensus calls for 365,000 new jobless claims, down from last week's 380,000. Existing home sales for March are also expected to improve slightly from an annual rate of 4.59 million homes to 4.62 million homes. Any strength in this key sector is good for the economy.

For now, my views about the markets developed through the Dorsey Wright & Associates (DWA) relative strength analysis are unchanged. US stocks remains the strongest asset category followed by Commodities, Bonds, International stocks, and Currencies. US stocks retain a very sizable lead over the other categories with the others clustered closely together. Mid-capitalization stocks are favored, growth is favored over value, and equal-weighted indexes are favored over capitalization-weighted ones. On a relative strength basis, DWA puts Consumer Discretionary, Information Technology, and Financials as the three strongest economic sectors.

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 ®, CRPC ® 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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