Tuesday, March 17, 2015

March 15, 2015

Volatility has returned to the markets in 2015 or has it? Compared to the previous three years—yes it has. Compared to a longer view of the markets, the year is shaping up to be average. I will come back to this thought shortly.

The Dow Jones Industrial Average (DJIA) and the S&P 500 are each down about 2% month-to-date and are slightly negative for the year. The Russell 2000 (smaller companies) has continued to maintain its February gains and is now up about 2.3% for the year. The tech-heavy NASDAQ is up about 2.9% for the year also holding on to gains from a strong February.

The Utilities and Energy sectors remain under pressure losing nearly 7.6% and 5.7% respectively so far in 2015. Utilities are down primarily due to higher interest rates, while the Energy sector continues to lose ground on weak oil prices. Year-to-date, WTI Oil is now down 15.8% closing Friday at $44.84 per barrel marking a nearly 10% drop in March alone.

As expected, the European Central Bank (ECB) began purchasing bonds in its own version of Quantitative Easing (QE) sending the Euro tumbling against the US Dollar. The Euro is now down 6.2% for the month and 13.25% for the year. Friday’s close of 1.049 Euros to the US Dollar is the lowest this exchange rate has been since early 2003. I do not anticipate the Euro will gain much ground against the US Dollar in the coming months due to a stagnate European economy and continued QE by the ECB. I believe Greece will continue to challenge investors in Europe and here at home as Greek efforts to resolve their economic mess fails to meet European creditors’ expectations.

Interest rates remain volatile. The benchmark US 10-Year Treasury yield has added almost 8 basis points since the start of the month closing Friday at 2.103%. Friday’s close, however, is a 14 basis point pullback from the recent high of 2.245% on March 6th. These moves in interest rates have been influenced, in my view, by a negative mixture of recent economic data including falling consumer sentiment, a decline in the February Producer Price Index (PPI), and continuing declines of retail sales all weighed on investors. Concerns over modest economic growth here and abroad may keep a lid on interest rates for now.

The year is off to a mushy start following a slew of mixed economic reports and ongoing worries over my big four economic issues (Federal Reserve raising interest rates, the Greece problems, Geopolitical concerns, and Domestic political concerns) which still do not appear to be close to resolution. Investors must remain patient.


I don’t know about you, but this year seems to be more volatile to me than recent years. To see if my hunch was true, I did some research on daily changes of the S&P 500 going back 35 years. Here are some of the key takeaways from my work:

 The average daily change during the first 49 trading days in 2015 is 0.71% either up or down. This compares to a daily average change of 0.53% last year, 0.54% in 2013, and 0.59% in 2012. So yes, we have been experiencing greater volatility than in recent years.
 The most volatile decade since the start of 1980’s was the first ten years of this millennium. From 2000 to the end of 2009 the average daily move of the S&P 500 was 0.94% either way.
 Over the past 35 years, the average daily move of the S&P 500 is 0.75%, not much different from the start of this year.

I also discovered a couple of other interesting facts:

 The good news is that over the past 35 years, there have been 4765 (53.7%) up days and 4113 (46.3%) down days. This relationship remains fairly consistent especially in years when the market goes up.
 The bad news is that over the past 35 years—down days typically move more to the downside (-0.77%) than up days move to the upside (+0.74%). This difference is even more pronounced over the past five years (2010 to 2014) where downside moves have averaged -0.73% and upside moves averaged +0.67%.
 Going back to the start of 2000, there have been four down years—2000 (-10.1%), 2001 (-13.0%), 2002 (-23.4%), and 2008 (-38.5%). The first three of these down years averaged 46.7% up days while you might be surprised to learn that 2008 actually had more up days (127) than down days (126).
 However, in 2008, the down days were much larger in magnitude than the up days -1.9% vs. +1.6%.
 The worst three days in the past 35 years were: October 19, 1987 when the S&P 500 lost 20.5%, October 15, 2008 and December 1, 2008 when the S&P 500 fell 9.0% and 8.9% respectively. The best three days were October 13 and 28, 2008 with 11.6% and 10.8% gains, and October 21, 1987 with a 9.1% gain. The takeaway from this observation is that during periods of extreme volatility, the markets may move both ways—not just down.

All in all, it appears that while the increased volatility we have experienced so far in 2015 is not pleasant, it certainly is not out of the ordinary, just the opposite, it is typical.


My most important message this week is do not let the negativity of the news cycle lead you to make bad investment decisions.

The markets are flat so far this year, however, more risky small capitalization stocks are positive and this is a good sign. Additionally, looking at key DorseyWright & Associates data, the Money Market fund category score (1.49 out of 6.00) and ranking (121 of 133) very low among all sectors, tells us that most investments are outperforming the Money Market sector on a relative strength basis. This is a positive sign for the longer term. The US Stock asset category remains firmly in first place of the six major asset classes with Bonds second, and International Stocks a close third. Again, this key relative strength data tells me not to step away from our current commitment to the equity markets.

By far the most significant economic event for the next couple of weeks is the Federal Reserve meeting starting Tuesday finishing with Chairwoman Yellen’s press conference on Wednesday afternoon. There is little expectation that the Fed will raise rates at this meeting, however, there will be obsessive behavior by analysts and talking heads over the wording of the press release and whether or not the word “patient” will be removed. Investors believe that as long as the Fed says they are remaining “patient” about raising rates, the actual move will be at least two Fed meetings away. As I have said before, the Fed must begin to normalize rates, but the continued drop of European interest rates and slack in the economy here at home, makes any increase in interest rates just a little bit more uncertain. I still look for the first 25 basis point increase this summer or early fall, and an uncertain (and possibly negative) reaction by the stock markets.

All of this uncertainty is feeding the greater volatility in the markets. However, as I have said, stay focused on the profitability of companies, the slowly improving nature of the US economy, and the technicals in the market. They are currently indicating a modestly positive year in the markets.

If you have any questions or comments, please do not hesitate to reach out to me.

Paul L. Merritt, MBA, C(k)P®, AIF®, CRPC®
NTrust Wealth Management

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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.

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 Dow Jones Global ex-US index represents 77 countries and covers more than 98% of the world's market capitalization. A full complement of sub indices, measuring both sectors and stock-size segments, are calculated for each country and region.

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.