Markets rallied this past week as investor outlook regarding the fiscal cliff improved enough to give most major indexes their second best performance of 2012.  Additionally, the cease-fire between Israel and Hamas helped calm markets abroad, and helped make Moody’s downgrade of French debt the previous week a distant memory.  However, concerns are beginning to resurface in Europe as the European Union (EU) has been unable to reach agreements on an overall EU budget and on further Greek debt restructurings.

The Dow Jones Industrial Average (DJIA) gained 421 points (3.3%) last week over three and one-half days of trading including a 173-point gain in light trading Friday.  The other major indexes followed with the S&P 500 added 3.6%, while the Russell 2000 and NASDAQ gained 4.0% each.  Four weeks through a five-week trading month, major US indexes remain in negative territory albeit in a much better place than the previous Friday’s close.  As of Friday’s market close, the DJIA is down 0.7% for November, the S&P 500 is off 0.2%, the Russell 2000 has fallen 1.4%, and the NASDAQ is down 0.4%.  With forty-seven weeks of trading completed so far in 2012, the DJIA is up 6.5%, the S&P 500 has added 12.0%, the Russell 2000 has increased 8.9%, and the NASDAQ leads with a gain of 13.9%.

Ten of the eleven major economic sectors were positive last week led Materials, Consumer Discretionary, and Information Technology all of which were up between 4% and 5%.  The Utilities sector was the only negatively performing sector losing just under 1% continuing a trend of under-performance that has dogged this sector most of the year.  For the year, the Consumer Discretionary sector leads with just over a 22% gain, closely followed by the Financials and Health Care sectors.  Utilities, Energy, and Real Estate are the three weakest sectors with only Utilities posting a negative return for the year.

International markets were up sharply last week despite the troubling news emerging from the EU Summit meeting late last week.  The MSCI (EAFE) index gained 4.8% and the European-only STOXX 600 added 4.0%.  I am having difficulty identifying specific reasons for the strength of European markets given the abysmal state of that region’s economy and the increasing difficulty for leaders there to achieve any meaningful solutions to their debt problems.  The European Union (EU) budget debate crystallizes the challenge facing the EU with leaders like Great Britain’s David Cameron demanding spending cuts for the EU at a time when most countries are struggling with budget cuts at home, while other leaders suggest that spending be increased to help the weaker EU economies.  Even as EU leaders are saying all the right things about being close to resolving the current economic crisis, I believe that more challenges will come from over the Atlantic as we move into 2013.

US Treasuries fell last week as investors’ appetite for risk returned which in turn benefited more equity-sensitive bond sectors such as high yield and preferreds.  The US Treasury 10-year yield closed Friday at 1.691% jumping from the previous week’s close of 1.580%.  Rising interest rates push down the value of bonds accounting for the weakness in the Treasury sector and making extended duration Treasuries the weakest performing bond sector last week.  The Barclays US Aggregate Bond index fell 0.3% last week following a couple weeks of limited strength and is now down 0.1% for the month, and up 4.3% for the year.  International bonds also did well as the US Dollar weakened against most major international currencies.

The US Dollar index fell 1.3% last week for the first losing week in the past five.  I believe this move can be attributed to the US Dollar role as one of the key “safe haven” investments over the past couple of years, and as investors sought out greater risk in their portfolios, the US Dollar was sold last week to buy other currencies like the Euro (+1.8%) and the Japanese Yen (+1.3%).  The movement of the US Dollar was reflective of a “risk-on” trade last week as investors were buoyed by optimistic comments by key European leaders such as German Finance Minister Wolfgang Schäuble’s about resolving the Greek debt crisis. 

The Dow Jones UBS Commodity index gained 2.2% last week boosted by a weakening US Dollar.  With nearly all commodity contracts traded in US Dollars, a weaker US Dollar makes commodities cheaper for international buyers helping to boost demand.  Gold increased by $37.10 (2.2%) to close Friday at $1751.80 per ounce bolstered by the hope of a European solution in Greece.  WTI Oil was also up 1.5% to close Friday at $88.26 marking the third weekly increase in a row.  Gold is up 1.9% for the month and 11.8% for the year, while WTI Oil is up 2.3% for the month and is down 10.7% year-to-date.

TOUGH TIMES BUT THERE ARE POSITIVES

The looming fiscal cliff has dominated, and will continue to dominate, the financial conversation at least until the end of the year.  And for good reason.  Failure to reach some kind of resolution and compromise on the key tax and spending issues associated with the fiscal cliff has the potential to push an already weak economy into another recession.  While the overwhelming consensus is that a compromise can and will be reached (this view helped pushed markets upward this past week), this belief is built upon an assumption that both political parties recognize that failure would result in political suicide.  I share, to a degree, that optimism; however, I still recall just how bitter previous the negotiations were and most of the same players and dynamics remain in place.  I also believe that achieving a grand bargain in such a short period is unlikely.  There are simply too many major issues to get resolved in just a couple of weeks.  Therefore, I believe a more realistic course of action will be an agreement to disagree and an extension of the deadline into the first part of 2013.  The markets may remain nervous (read volatile), however, kicking the can down the road will not, in my view, lead to a major negative market correction.  With this short-term outlook reviewed, let’s take a moment to discuss some of the real positives that exist for the longer-term.

My partner, Stacy, and I attended our national broker/dealer (Commonwealth Financial Network) conference just a few weeks ago over the first weekend in November.  This meeting gives us the opportunity to hear from some of the nation’s leading economists and money managers.  When I listen to the various speakers, I listen for common themes among them and the implications of what they say.  This conference provided several themes that I want to share with you:

1)      The United States has the largest oil reserves in the world, dwarfing the Middle East, and we can be completely energy independent by the end of this decade.  Proven technologies in oil and gas extraction will provide the United States with multi-generational, affordable, energy.  Given the opportunity to exploit these resources (not a complete certainty with the current EPA); the energy sector would create approximately 3 million new jobs.  The other macro aspect of energy independence would be an improvement to the national Gross Domestic Product (GDP) by several percentage points because our imports would be significantly reduced.

2)      US manufacturing will continue to expand.  The United States is the most prolific manufacturing country in the world, and this lead will continue.  Having access to cheap energy is an important component to this expansion, but so is our world-leading manufacturing technology and flexible, well-educated labor force.  The US will never be the home of unsophisticated, labor-intensive, industries again; however, we will continue to attract sophisticated manufacturing from around the globe.

3)      Global infrastructure will command major investments.  The economic development within many emerging market countries will necessitate the build-out of ports, roads, electric transmission capabilities, and airports.  The aging infrastructure here in the US will force municipal, state, and federal spending on deteriorating bridges, roads, and airports.  Finally, the growing energy infrastructure requirements will see additional pipeline, port, and other infrastructure spending both here in the US and North America.

What makes these three themes so powerful is the expectation that they are sustainable and will lead to millions of new high-paying, high-quality jobs.  These jobs will be not only be directly related to the various industrial sectors mentioned, but also in the peripheral economy, most notably in home construction.  The future is actually bright should we make a vigorous effort at exploiting our natural advantages.

LOOKING AHEAD

After a month if deterioration, the New York Stock Exchange Bullish Percent (NYSEBP) saw a slight improvement this past week.  The NYSEBP finished October at 62.68 with demand (buying) in control and then moved to a low of 53.59 on November 16^th with supply (selling) in control.  In the past five trading days, the NYSEBP has risen slightly to close at 54.73.  Supply is still in control, and by definition, it would take an increase to 59.59 for the NYSEBP to reverse back to demand.  For those who may not be familiar with the NYSEBP, it is the primary technical indicator I use to determine the general trend of the markets.  The NYSEBP is calculated by looking at each stock listed on the New York Stock Exchange, determining if it is in a buy or sell signal (using a Point and Figure chart), and adding up all of the buys and dividing that number by the total number of stocks listed on the New York Stock Exchange.  This indicator provides a broad and important view of market trend and general risk level.  At reading of 53.59 means that nearly 54% of stocks are in a Point and Figure buy signal, but selling pressure currently exists (the NYSEBP has been falling).  The risk is moderate with just over half of stocks giving a buy signal.  If the NYSEBP was 70% or greater, risk would be considered high; while a percentage of less than 30% would represent lower risk.

Europe will remain in focus.  The EU, the International Monetary Fund (IMF), and the European Central Bank (ECB) are struggling to deal with the heavy load of outstanding Greek debt.  I believe that the key players are coming to the conclusion that Greece will never be able to pay back all of their outstanding bonds, so other methods of reducing debt are under consideration such as simply buying the bonds on the open market.  Efforts by EU leaders to instill confidence in the process has certainly calmed the bond market, however, it has also undermined this process by driving up Greek bond prices making bond purchases by the EU a more expensive proposition.  Economic stress in Spain has also raised the specter that the Catalan region of Spain is going to move forward with an independence referendum.  The British paper, The Telegraph, reports that today’s (Sunday) elections will bring a pro-independence party into power, and that 57% of Catalans support independence from Spain.  The main complaint is that Catalonia is paying more than their fair share of taxes to the Spanish federal government.  Any vote of independence is likely several years to the future, but calls into question the integrity of the EU at a difficult time.

The upcoming week has several important economic reports due out. The most significant will be the second estimate of the 3^rd Quarter US GDP.  Consensus is anticipating an upgrade to 2.8% from the first estimate of 2.0%.  Such a jump would be a very strong indicator of an improving economy.  October New Home Sales is expected to show a very minor drop from the annual rate reported in September of 389,000 units to 387,000.  Additionally, the weekly Initial Jobless Claims report for last week is expected to show an improvement of 20,000 from the previous week’s surprisingly high 410,000 to 390,000.  In general, these and the other economic indicators continue to reflect an economy that is growing, but a very modest rate.

The Dorsey Wright & Associates analysis of the markets remains unchanged as it has for most of the year at this point.  Data indicates that US stocks and Bonds are the two favored major asset categories followed by Foreign Currencies, International stocks, and Commodities.  Middle capitalization stocks are favored, as is growth over value, and equal-weighted indexes over capitalization-weighted indexes.  Equal-weighted indexes are those where each stock in the index is weighted the same, while in capitalization-weighted indexes the larger stocks have the largest weighting consistent with their size relative to the other stocks.  On a relative strength basis, the top three major economic sectors are unchanged: Consumer Discretionary, Health Care, and Financials.  Consumer Staples, Real Estate, and Information Technology are in positions four through six.  Energy and Utilities are in the bottom two sectors.  US Treasuries and International Bonds are favored in the Bond category, while US and Developed Markets are favored within the International stock category.  Energy and Agriculture are the favored sectors within the Commodity category.

My next Market Commentary and Update will be published in two weeks.

Paul L. Merritt, MBA, AIF^®, CRPC®

Principal

NTrust Wealth Management

P.S.  If you think this type of analysis would be of benefit to anyone you know, please share this communication with them.

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.

Emerging market investments involve higher risks than investments from developed countries and 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.  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 CBOE Volatility Index - more commonly referred to as "VIX" - is an up-to-the-minute market estimate of expected volatility that is calculated by using real-time S&P 500^® Index (SPX) option bid/ask quotes. VIX uses nearby and second nearby options with at least 8 days left to expiration and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index.

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.

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 generally are 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.

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. 

 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 and is a capitalization-weighted index meaning the larger companies have a larger weighting of the index.  The S&P 500 Equal Weighted Index is determined by giving each company in the index an equal weighting to each of the 500 companies that comprise 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 Russell 2000 Index Is comprised of the 2000 smallest companies of the Russell 3000 Index, which is comprised of the 3000 biggest companies in the US.   The NASDAQ Composite Index (NASDAQ) is an index representing the securities traded on the NASDAQ stock market and is comprised of over 3000 issues.  It has a heavy bias towards technology and growth stocks.  The STOXX^® Europe 600 is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index.  With a fixed number of 600 components, the STOXX Europe 600 represents large, mid, and small capitalization countries of the European region

The 2012 presidential election is finally behind us.  What lies ahead is the prospect of significantly higher taxes and drastic cuts to government spending (the fiscal cliff) unless the President and Congress can find ground to compromise and diminish the potential setbacks to the US economy.  If you look at the market’s performance since the election, I believe investors are signaling that they do not have a lot of confidence that such compromise will be forthcoming.

The Dow Jones Industrial Average (DJIA) fell 278 points (-2.1%) last week including a 312 point loss on the day following the election.  The S&P 500 lost 2.4%, the Russell 2000 fell 2.4%, and the NASDAQ gave back 2.6%.  These losses have helped take some of the luster off what has been a good year for US stocks.  For the year, the DJIA is now up 4.9%, the S&P 500 has risen 9.7%, the Russell 2000 has gained 7.3%, and the NASDAQ is up 11.5%. 

The major economic sectors here in the US were all negative this past week.  Utilities lost just over 4% to lead all sectors to the downside.  This sharp negative move pushes Utilities into an overall negative return for the year.  Telecom, Financials, and Consumer Discretionary were the next three poorest performing sectors behind Utilities losing between 3.5% and 2.4%.  Materials, Industrials, Consumer Staples, and Health Care were the best performing sectors and all lost between 1% and 2% for the week.  For the year, Consumer Discretionary, Financials, Health Care, and Telecom remain the best performing sectors and all have outperformed the NASDAQ.  The top three sectors that lost ground last week are also some of the highest dividend payers of the eleven major sectors.  With the looming tax increases on capital gains, dividends, and interest payments ready to go into place on January 1^st, I believe that investors are adjusting their expectations for the after-tax value of the income they receive from their investments in these sectors.

International markets were also down last week.  The MSCI (EAFE) index fell 2.1% and the European-only STOXX 600 lost 1.7%.  While I believe some of the weakness in markets abroad is a sympathetic sell-off with US markets, European markets were also hurt by the riots in Greece and concerns that Greece may run out of money before European leaders approve the next round of bailout funds even as the Greek Parliament passed a new round of austerity measures.  The European Union (EU) has also seen its unemployment rate surge to new post-WWII highs and European Central Bank (ECB) President Mario Draghi warned last week that the European economy would remain “weak” through next year.

Bonds were the beneficiary of investor worries about stocks last week as the Barclays Aggregate Bond index gained nearly 0.2% and is now up over 4.5% for the year.  Extended duration US Treasuries and corporate bonds were the best performing bond sectors as investors’ purchases pushed the US 10-year and US 30-year yields down to 1.614% and 2.747% respectively.  The one-week drop in interest rates was the largest in seven weeks.  High yield, preferreds, and high quality corporate bonds were the weakest sectors.

The US Dollar index gained 0.5% last week and this index is now up for the third consecutive week.  The Euro fell just over 1% to close at $1.271.  This was the largest one-week loss in two months.  I believe the challenges facing the EU are overwhelming currency traders who also see continued weakness in the US Dollar due to the expectation for continued outsized budget deficits in Obama’s second term.  I think the US Dollar’s strength can be equated to PIMCO’s Bill Gross’s worldview that the US is the “cleanest dirty shirt” in the closet.   

The Dow Jones UBS Commodity index gained a slight 0.3% last week primarily on the strength of precious metals.  Gold added $55.70 (3.3%) to close Friday at $1730.90 per ounce.  This gain is, I believe, primarily due to the increasing likelihood that the re-election of Mr. Obama will result in the continuation of a highly accommodative monetary policy to help finance the large deficits his administration may run in his second term.  Since many see gold as a hedge against weak paper currencies, gold and silver purchases were strong and reversed a recent trend of weakness.  WTI Oil gained $1.21 per barrel (1.4%) closing Friday at $86.07.  The Bloomberg news service said that the bump in oil prices was attributable to a higher-than-expected jump in the Consumer Confidence index released this past Friday.  Another story in the Wall Street Journal reported that daily oil consumption in the US has fallen by two million barrels of oil from its high of 20.8 million barrels in 2005 to just 18.8 million barrels today. 

LOOKING AT THE REST OF THE YEAR AND BEYOND

I like clichés.  I like them because they have their roots in some truism of human behavior.  My cliché today is, “the only certainty in life is death and taxes.”  However, I am going to add one more caveat, and that is “media pundits telling all of us what this presidential election means.”  I will humbly add my name to the list of people commenting about the election and what it means to us.

As I have said repeatedly, I generally avoid all attempts at making predictions because I believe the effort is a fool’s errand.  Instead, I prefer to focus on data, and specifically the data provided by Dorsey Wright & Associates.  My belief is that most economic circumstances that impacts what happens in markets both here and abroad are beyond our control so we must focus on making the best decisions given the circumstances at the time we make a decision and then revisit those decisions as events evolve.  However, I am going to make some general observations about where things stand after the election and how they might affect all of us going forward.

The most pressing of issues is the fiscal cliff.  The law currently on the books says that unless Congress and the President act to change existing law, a nearly $600 billion tax increase will go into effect on January 1^st along with $500 billion in spending cuts—half aimed directly at Defense.  The spending cuts are referred to as “sequestration.”  A number of different analysts have stated that the fiscal cliff, if enacted as is, would reduce the nation’s Gross Domestic Product by about 4%.  Through the first three quarters of this year, the GDP is growing at an overall rate of 1.7%, and the most optimistic estimates of further growth are no higher than 2%.  This means that the fiscal cliff will put the US squarely back into a full recession with a net GDP growth rate of -2%.  I cannot fathom any scenario where the President and Congress would knowingly and willingly not take bipartisan action to reach a compromise on this matter and reach an agreement.  I believe the markets will remain nervous and this nervousness translates into increased volatility until an agreement is reached.

Like it or not, it now looks like Obamacare will now become a way of life in our economy.  I am not going to debate the argument about whether this legislation is good or bad, but rather focus on the economic impact this sweeping legislation will have on businesses.  If the early headlines are any indication, the news is not positive.  John Schnatter, President and CEO of Papa John’s Pizza (and a Romney supporter) was quoted by WPTV.com saying that Obamacare “would add 10-14% for customers buying a pizza,” and that it “was likely that some franchise owners would reduce employees' hours in order to avoid having to cover them,” referring to the requirement that any worker who works more than 30-hours per week must be covered by health insurance.  A franchisee for Applebee’s has been excoriated on Twitter for suggesting on the Fox News Channel that with Obamacare going into effect he would be forced to consider a hiring freeze or slowing expansion.  Again, I am not taking a position pro or con on Obamacare, I am just saying there are consequences to every law and regulation that the government places on businesses, and in the end, the economic data will give us some idea of the true costs of such legislation and regulations.

I also believe that the chances of reducing the federal deficit in a meaningful way will be muted.  President Obama has shown little inclination to actually do something about the budget deficits (and raising taxes on the upper income earners will not close the gap in a meaningful way) so expect more of the same.  I believe the surge in gold prices following the election was an indication that gold traders see it the same way.  As I have said in previous Updates, my view is that the price of gold is a referendum on how much money the Treasury must print to fund these deficits.  The bigger the deficits, the more money the government prints,  the weaker the US Dollar will eventually get, and the greater the possibility gold will be purchased as a store of real value.

Interest rates will also be an important indicator of how the markets grade the President and Congress’ ability to manage the economy.  US Treasury rates fell sharply this past week signaling bond investors’ belief that the economy is not going to grow in a meaningful way for a very long time.  Remember, that with inflation currently at 1.99%, anyone who buys a US Treasury note with a maturity of 10-years or less is actually losing money in real terms for the duration of owning the note.  Now I recognize that there is a great deal of debate about the future course of interest rates.  Most analysts believe, and I share this belief, that interest rates will eventually go higher.  The question no one really can answer is when this will happen.  I believe that interest rates will rise sometime during the next four years and they will rise because either the government works well together and real growth kicks in (good higher interest rates), or because the private sector loses patience with the political class and forces interest rates higher because of concerns over repayment of funds (bad higher interest rates).  Either way, investors must pay attention to interest rates closely to avoid the possibility of taking significant losses in their bond portfolios.

I believe we are in for some challenging times over the next several quarters.  However, I do believe there are some notable and very positive factors that will be working on the economy in the next four years that will help mitigate the mess we have in Washington.  I will address those factors in my next Commentary in two weeks.

LOOKING AHEAD

The New York Stock Exchange Bullish Percent (NYSEBP) turned negative Friday in response to market actions during the week.  This move by my most important technical indicator suggests that supply (or selling pressure) is now the dominant theme in the markets.  US equities and Bonds still remain the top two favored major asset categories, so I will be looking at reducing some of the risk in my portfolios but not moving away from stocks on a whole—for now.  The value of the NYSEBP is 59.91.  Not a bad number overall, but it has been slowly weakening over the past couple of months.

The S&P 500 has violated its key long-term support level of 1380.  This support line (trend) has been in place since Thanksgiving of last year and is an important signal to investors.  This does not mean that stocks are ready to fall off the cliff, but it does suggest that there is greater downside risk in the markets and all investors should pause and evaluate their portfolios at this time.

We have a number of important economic reports coming out this week.  The biggest, in my view, is the October Retail Sales report scheduled for release at 8:30 AM on Wednesday.  Consensus is expecting a drop of 0.1% compared to an increase of 1.1% in September.  This report is always important because of the importance consumer spending is to our GDP.  The October Producer Price Index report on Wednesday morning and the October Consumer Price Index report on Thursday will give investors a sense of the rate of inflation in the country.  Expectations are that price increases will be muted compared to September’s numbers.  The weekly Initial Jobless Claims number on Thursday is expected to increase from 355,000 the week before to 376,000, and October’s Industrial Production report on Friday is expected to show an increase of 0.2% following September’s increase of 0.4%.

The Dorsey Wright & Associates analysis of the markets remains unchanged as it has for most of the year at this point (other than the NYSEBP reversal).  Data indicates that US stocks and Bonds are the two favored major asset categories followed by Foreign Currencies, International stocks, and Commodities.  Middle capitalization stocks are favored, as is growth over value, and equal-weighted indexes over capitalization-weighted indexes.  Equal-weighted indexes are those where each stock in the index is weighted the same, while in capitalization-weighted indexes the larger stocks have the largest weighting consistent with their size relative to the other stocks.  On a relative strength basis, the top three major economic sectors remains unchanged: Consumer Discretionary, Health Care, and Financials.  Consumer Staples has pushed into the number four position while Real Estate slipped to number five.  US Treasuries and International Bonds are favored in the Bond category, while US and Developed Markets are favored within the International stock category.  Energy and Agriculture are the favored sectors within the Commodity category.

In honor of Veteran’s Day I would like to ask everyone to take a moment to thank a a soldier, sailor, marine, or airman for their service.  I am blessed to have a step-grandfather who served in World War I, another grandfather who served in WWII, a father who served in Korea and Vietnam, and a step-father and father-in-law who also served in Vietnam.  I am always mindful of their service to this great nation and we should never forget the sacrifice that these, and millions of other, men and women have made for our great country.

After much thought and consideration, I have decided to reduce my Market Commentaries to every other week rather than weekly for now.  The holidays are a welcome distraction for all of us and the time we spend with our families is important, and I have some additional writings I want to complete regarding individual investors and their retirement plan investing.  You will be able to find those writings on the NTrust Facebook page (as you can all of my market commentaries), as well as on LinkedIn, and on blogger.com.  So going forward, please look for my market commentary every other week.

Sincerely,

Paul L. Merritt, MBA, AIF^®, CRPC®

Principal

NTrust Wealth Management

P.S.  If you think this type of analysis would be of benefit to anyone you know, please share this communication with them.

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.

Emerging market investments involve higher risks than investments from developed countries and 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.  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 CBOE Volatility Index - more commonly referred to as "VIX" - is an up-to-the-minute market estimate of expected volatility that is calculated by using real-time S&P 500^® Index (SPX) option bid/ask quotes. VIX uses nearby and second nearby options with at least 8 days left to expiration and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index.

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.

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 generally are 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.

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. 

 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 and is a capitalization-weighted index meaning the larger companies have a larger weighting of the index.  The S&P 500 Equal Weighted Index is determined by giving each company in the index an equal weighting to each of the 500 companies that comprise 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 Russell 2000 Index Is comprised of the 2000 smallest companies of the Russell 3000 Index, which is comprised of the 3000 biggest companies in the US.   The NASDAQ Composite Index (NASDAQ) is an index representing the securities traded on the NASDAQ stock market and is comprised of over 3000 issues.  It has a heavy bias towards technology and growth stocks.  The STOXX^® Europe 600 is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index.  With a fixed number of 600 components, the STOXX Europe 600 represents large, mid, and small capitalization

countries of the European region.