MARKET UPDATE AND COMMENTARY
October 12, 2014


October is off to a tough start. I have no doubt most of you are aware of last week’s volatility so I will not spend time discussing what you already know, rather I want to spend the bulk of this update discussing what led to the selloff, risks, and what my technical indicators are suggesting.

First, a quick market recap.

The Dow Jones Industrial Average (DJIA) fell 466 points (-2.7%) last week closing Friday at 16,544. The size of the daily swings were among the largest of the year. Monday was the “quiet” day with the DJIA losing -18 points. Beginning Tuesday the DJIA swings were off and running losing -273 points, followed by a 275 point gain on Wednesday (best one day gain of the year), a -335 point drop on Thursday (the worst one day loss of the year), and a -115 point drop on Friday. For the year, the DJIA is now down 33 points (-0.2%). Looking at the other major indexes I track the S&P 500 fell -3.1 % last week, the Russell 2000 gave back -4.6%, and the NASDAQ lost 4.4%. For the year the S&P 500 is up 3.1%, the Russell 2000 is down -9.5%, and the NASDAQ is up 2.4%.

Looking at the major economic sectors, Real Estate, Utilities, and Consumer Staples posted positive returns last week likely helped by falling interest rates and the defensive nature of those sectors. Energy, Industrials, Materials, and Technology were the weakest performing sectors losing over 4% each. For the year, Real Estate, Health Care, and Utilities have all posted double-digit gains to lead all sectors; while Energy, Industrials, and Consumer Discretionary are the weakest sectors losing between -2% and -4%.

International markets were all down as well. The European-based STOXX 600 index fell -4%, the worst of the major international indexes I follow. The best performing region last week was the Emerging Markets Region losing just under -0.6%. The broad MSCI EAFE international index fell -2.4% for the week. For the year, the MSCI EAFE index is down -6.6%, the STOXX 600 is off -2.0%, the Emerging Markets Region is up 1.6%, the Asia/Pacific Region is down -2.8%, and the Americas Region is up 1.3%.

The bond market rallied as stocks sold off. The Barclays US Aggregate Bond index gained 0.7% and is up 5.1% for the year. The US 10-year Treasury yield fell 14.5 basis points (a basis point is 0.01%--like a penny to a dollar) to close Friday at 2.29%. This 10-year yield is at its lowest since June 19, 2013. Long-duration bonds, the most interest rate sensitive category, performed well, while credit sensitive bonds like high yield underperformed.

The Dow Jones UBS Commodity index gained 0.2% last week on the strength of gold (+2.4%). WTI Oil continued its slide to close Friday at $85.82 (-4.4%) on weaker global demand and strength of the US Dollar. Natural Gas also fell last week losing -4.5%, while most agricultural commodities managed a slight gain. Falling oil prices are contributing to the weakness in the Energy sector, but will help the average family as gas prices fall.

WHAT’S BEHIND THE SELLOFF?

The consensus within the financial media attributes the current weakness in equity markets to fears of a global slowdown. Most of the attention is on Europe which appears to be heading into another recession. Germany’s 2nd Quarter GDP contracted -0.2%. European Central Bank (ECB) head Mario Draghi’s comments in which he said he was not optimistic about future European growth without structural reform has not helped investor sentiment. Extremely low 10-year government bond rates in the Euro Zone suggest that bond investors share his sentiment. The German 10-year Bund closed Friday at 0.89% and France’s 10-year bond settled at 1.25%. Fears of deflation are resurfacing and Draghi is expected to seek significant infrastructure spending by Germany and other European nations early next week.

I am losing confidence in Europe. The Euro has tied European nations together as never before, but the politicians in the major economies have proven incapable of passing key structural reforms in labor laws and taxation policies necessary, in my view, to get Europe growing again. Draghi gave European politicians time to implement policy changes back in July 2012 when he told the world that he would do everything necessary to save the Euro. Unfortunately, nothing has changed. Time, in my opinion, is running out. I believe another European recession is inevitable and this in turn will affect global economies.

There are several immediate effects here at home. First, the US Dollar has surged relative to the Euro. This hurts US exports to Europe because goods and services now cost almost 10% more than they did three months ago. Second, the Federal Reserve has signaled that it may have to put off raising rates in the US longer than planned over fears that US growth will suffer from a global economic slowdown. Third, if Draghi implements a more aggressive quantitative easing (QE) program in Europe, the value of the Euro is likely to continue falling just as QE here led to a weakening US Dollar. This is not a recipe for global growth, however, I believe some of the negatives will be mitigated here because of cheaper imports, lower commodity prices, and a desire by foreigners to continue investing in the US.

Adding to European concerns, we’ve had confirmation of the first US transmission of the Ebola virus in Dallas. I believe that if the Ebola virus spreads here and in Europe, global economies (not to mention the human toll) will suffer. I sincerely hope the Center of Disease Control’s assurances that they can contain this virus are true, however, if they are wrong, I cannot see how such a catastrophe will not impact the global economy. I am not overreacting at this time, but I am remaining extremely vigilant on this issue.

Finally, the geopolitical situation remains tenuous. Setbacks continue in Middle East, China and Russia appear undeterred, and the absence of North Korea’s premier over the past several months is raising concerns about North Korean stability.

I realize that I have set forth a pessimistic view of the world, but that is where we are today. The markets have taken notice and I believe these are the circumstances contributing to the current short-term weakness in the markets.

While it is easy to focus on all the negative headlines, I want to remind you of the positives. First, the US economy continues to grow. Key economic indicators reflect this strength, however, investors have ignored these facts and sold stocks. Second, my important long-term technical indicators continue to favor stocks. Third, with the recent selloff, most stock categories have reached very oversold levels. In past selloffs, stocks rarely remained at such oversold levels for long before they rallied. While every situation is different, I consider this an important factor. US companies remain strong and I believe they will be able to weather the current weakness, and if the global economy weakens as some predict, I believe the Federal Reserve will have no choice but to hold off raising rates—a positive for markets in the short-term.

LOOKING AHEAD

I will be watching small cap stocks closely. I believe stability will first appear in this sold off market segment. While I have repeatedly said that higher interest rates represent a strengthening economy, the prospect of delayed rate hikes by the Federal Reserve will be welcomed by most investors.

I also believe that higher interest rates will signal a strengthening economy. If the 10-year and 30-year US Treasury yields start climbing again, the equity markets may follow. Remember, the Federal Reserve does not set longer rates so this observation is not inconsistent with my view that the Fed may hold short rates steady for a longer time.

We will be entering earnings season soon. Corporate profitability is critical to stemming the current slide in stock prices. I will be watching earnings announcements very closely.

Among the key economic reports due out next week, the September Retail Sales report will be published on Wednesday. Consensus is expecting a slight pullback of -0.1% compared to August. I believe any upside report will be well received. Weekly Jobless Claims will be announced on Thursday and this is always a closely watched report. Consensus expects 290,000 new claims which would continue reflect an improving employment situation.

Small cap stocks (Russell 2000) have corrected over 10% from their earlier high this year. Technology stocks (NASDAQ Composite) are off 7.2% from their high in September, and large cap stocks (S&P 500) are off 5.6% from their high. A mild correction at this point.

I fully expect volatility to continue with so many uncertainties facing investors. Volatility is unpleasant, but a natural condition in stock markets. However, I will continue watching my technical indicators for any serious breakdown and I will let you know if and when that happens.

If you have any questions or comments, please reach out to me.





Paul L. Merritt, MBA, C(k)P®, 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 Dow Jones Global ex-US index represents 77 countries and covers more than 98% of the world's market capitalization. A full complement of subindices, measuring both sectors and stock-size segments, are calculated for each country and region.

MARKET UPDATE AND COMMENTARY
September 28, 2014

I told myself that I was not going to do it, but I just can’t help myself: there are now just 88 days till Christmas! You may be asking yourselves why on earth is Paul bringing up the onset of the holiday season? I have two reasons. First, I am a very slow shopper so I need to start thinking about gifts now if I am going to meet the holiday deadline. Second, and what really matters, is that we are now three-quarters of the way through 2014 and rapidly closing in on 2015. I would like to offer a few thoughts about where we are and where we might be going over the next few months. Before I do, I will quickly summarize September’s actions.

September has two trading days left and the S&P 500 must rally 21 points (1%) to close out the month positive. For the year, however, the S&P 500 is up a respectable 7.3%. The Dow Jones Industrial Average (DJIA) is positive by 0.1% but lags the S&P 500 with a gain of just 3.2% for the year. The technology-heavy NASDAQ exchange is down 1.5% in September but is up 8.0% for the year. Smaller company stocks as measured by the Russell 2000 have had a tough month and year with this index falling 4.7% in September and losing 3.8% for the year.

Interest rate sensitive sectors have underperformed in September as interest rates have made their largest monthly increase in 2014. The US 10-year Treasury Yield has climbed 19 basis points (0.19%) to close Friday at 2.53%. The Real Estate and Utilities sectors have lost about 6% and 4% respectively for the month. The Energy sector has also been hit hard losing a little more than 6% as energy prices continue to pull back. Only Health Care and Consumer Staples have managed to post a positive month so far.

International regions are having a tough month as well. The Emerging Markets region has fallen 5.0% in September followed by the Asia/Pacific region with a 3.7% drop while the Developed Markets region is down 2.8% in September. For the year, the Emerging Markets region is up 4.3%, the Asia/Pacific region is up 1.7%, and the Developed Markets Region is up 2.4%.

The second estimate of the 2nd quarter Gross Domestic Product (GDP) was released on Friday showing an upward revision in real GDP from 4.2% to 4.6%--welcomed, but expected news. The GDP Price Deflator (a measure of inflation) remained unchanged at an annual rate of 2.1% continuing to give the Federal Reserve more latitude on when they may start raising interest rates.

THE YEAR SO FAR

Increasing geopolitical instability has been the overarching theme in the news this year. Ukraine fighting to retain its sovereignty from an expansionist Russia, the rise of ISIS and the increasing military involvement by the US in the Iraq/Syria region, and a more aggressive China are, in my opinion, the most significant challenges facing the US and investors today. Quietly, Argentina and Venezuela are suffering severe economic setbacks led by very socialistic governments, and Brazil finds itself in the midst of its own economic challenges. In addition to geopolitical concerns, investors remain fixated on parsing every word the Federal Reserve utters about the future of monetary policy.

The US economy has continued its “plow horse” growth. After a weather-related setback in the first quarter of the year, the economy rebounded in the second quarter keeping pace with an overall growth rate of just around 2.5%. Corporate profits remain at record levels. The GDP report released on Friday showed that non-financial US corporate profits rose 11.9% and the overall percentage of profits to GDP is at its highest since the early 1950’s. At the same time, European and Asian economies are stagnant or slowing down.

This economic divergence between the United States and the rest of the world has the attention of international investors. Demand for the US Dollar has risen dramatically (foreign investors must convert their home currency into US Dollars to invest here). The Euro has fallen 9.4% to the US Dollar since May 8th and the US Dollar index has increased 8.5% over the same period. This is a seismic shift in terms of currency changes and I believe related, in a positive way, to the rise in interest rates. Let me explain.

While the Federal Reserve controls very short-term interest rates, the market sets longer rates. As Scott Grannis summed it up well this week in his blog, “10-year (Treasury) yields are largely driven by the market’s expectations for economic growth and inflation.” Watching the benchmark 10-year Treasury yield, rising rates indicates a positive growth outlook given the tempered rate of inflation. At the same time the European Central Bank (ECB) is getting ready to launch their own quantitative easing (QE) program to fight sagging economic growth in Europe while the Fed must address raising rates in response to stronger economic growth here. The Federal Reserve, I believe, will be forced to raise rates in response to these changes.

While I believe US markets are the place to be, this does not mean that going forward investors do not face some headwinds, we most certainly do. A rise in interest rates may result in a revaluation of interest rate sensitive stocks such as we have begun to see in the utility and real estate sectors. Additionally, demand for these same stocks may lessen as more conservative investors shift some of their investments back into higher yielding bonds. Greater supply implies lower prices.

So far in 2014 there has been a shift away from small-capitalization stocks. These stocks have underperformed large cap companies by nearly 10% on average. As the theory goes, when investors become nervous about the markets in general, small caps are sold first. I understand this theory, but I am tempered by the knowledge that this has happened several times over the past few years only to see the “riskier” part of the stock market rebound swiftly. As I said in my last Update and Commentary, if you are uncomfortable with your stock exposure, look to the small and mid-cap holdings to raise cash.

Going forward, I believe we will continue to see higher volatility and possible short-term disruptions in stock prices. I am firmly committed to overweighting US stocks over international stocks and bonds. The US economy, for many reasons, has the ability to adapt to the challenges that may lie ahead. US companies are extremely well run and have strong balance sheets. If Washington addresses some of the fiscal policies holding back our economy, we will see this plow horse economy start to gain momentum. Finally, the Federal Reserve must continue to manage monetary policy effectively. I believe the secular bull market will continue to run over the next year or two.


LOOKING AHEAD

September has been a lackluster month for stocks. If the month ended this past Friday, it would be the third weakest month (measured by the S&P 500) and one of four negative months for the year. January and July were worse.

Rising rates have put pressure on many bond sectors with high yield and extended duration among the weakest performers. This may continue if rates keep rising in the last quarter of the year.

The DorseyWright & Associates Money Market sector score currently stands at 1.65 (out of 6.00) up from 1.48 at the end of August. This sector’s overall ranking remains at 128 out of 134, and while this is a trend I generally do not like to see, I am not overly concerned with the sector ranking unchanged at 128.

The September Employment Situation report will be published on Friday. This monthly jobs report is closely watched by investors worried about an early increase in interest rates by the Federal Reserve. The August report surprised investors with a job increase of just 142,000, but consensus is expecting the August number to be adjusted significantly upward and for the September non-farm payroll to show an increase of 215,000 jobs. While the jobs report is very important to investors, it is hard to predict how investors will react to either an upside or downside surprise given the many Federal Reserve cross currents impacting investor decisions.

If you have any questions or comments, please reach out to me.





Paul L. Merritt, MBA, C(k)P®, 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 Dow Jones Global ex-US index represents 77 countries and covers more than 98% of the world's market capitalization. A full complement of subindices, measuring both sectors and stock-size segments, are calculated for each country and region.

MARKET UPDATE AND COMMENTARY
September 14, 2014


Stocks here and abroad have lost some of the momentum they carried into September following a strong August. The US and global economic and political backdrops have not changed dramatically, but concerns that the Federal Reserve will start raising rates earlier than anticipated has changed and investors pushed interest rates up sharply in anticipation of the move.

All major US and international indexes (except for the European STOXX 600) that I follow are down in September. The Dow Jones Industrial Average (DJIA) is down -0.7%, the S&P 500 is off -0.9%, the NASDAQ is down -0.3%, and the Russell 2000 has fallen -1.2%. Looking globally, the Dow Jones Global Dow Ex-US index is down -1.6%. The Emerging Markets region is also off -1.6% followed by the Asia/Pacific region (-1.3%) and the Developed Markets region (-1.2%). The STOXX 600 is up 0.7% in September on the strength of a strong first week of the month. For the year the S&P 500 is up 7.4%, the NASDAQ is up 9.4%, the DJIA is up 2.5%, and the Russell 2000 is down -0.3%.

Interest rates have risen sharply in September. The benchmark US 10-year Treasury yield has increased 27 basis points (a basis point is .01%) pushing up the 10-year yield to a Friday close of 2.606%. The Barclays US Aggregate bond index is down 1.2% in September (bond prices will move inversely to interest rates) on the jump in rates. While this may not sound like a large move relative to what you may generally observe in the stock market, it represents a decline of nearly 25% of all gains made by the Barclays in 2014.

One of the big economic stories in 2014 is the continued strengthening of the US Dollar. The US Dollar index, which measures the value of the US Dollar compared to a basket of six major currencies, is up 1.8% in September, and is now up 5.2% in 2014. A stronger US Dollar makes imports and commodities cheaper, but also makes US goods abroad more expensive. As I noted in my previous Market Update and Commentary, the US Dollar’s strength is attributable to higher US interest rates, a growing economy, and an expectation that rates and the economy will continue to rise. I firmly believe that a strong US Dollar is good for all Americans over the long term.

Commodity prices continue to fall. The Dow Jones UBS Commodity Index is down -4.2% in September and is off -12.5% from its high on April 29th. Over this same period, WTI Oil fallen -5.3%, Gold is down
-5.0%, Natural Gas is down -19.6%, and Corn is off -33.9%. I believe agricultural prices are down because of a terrific harvest. Energy prices are under pressure because of greater US production of oil and gas coupled with a stronger US Dollar and weaker global demand, while higher interest rates and a stronger US Dollar have hurt the price of Gold. Falling energy prices and increased US energy production have very positive geopolitical consequences for the US because it puts serious pressure on our adversaries like Russia and Iran who depend on high energy prices to fund their regimes, and because we will be able to provide the energy to Europe they now receive from Russia. Falling prices will also help consumers here at home by increasing discretionary income and helping grow the US economy.


PUTTING INTEREST RATE CHANGES IN PERSPECTIVE

What exactly does a 27 basis point (bps) jump in the 10-year US Treasury mean? How does it compare to other recent interest rate changes? I will answer these questions as succinctly as I can in an effort to help you understand this very important shift in rates and how it may influence your portfolio. Let me emphasize here that past performance is not indicative of future returns and that there may be more than just interest rates affecting stock and bond valuations.

I have examined four previous major interest rate increases over the past decade where the rates increased from below 3%. These periods are:

____ Period______ ___Change in 10-Year Treasury Yield___
Dec 2008/Jun 2009 174 bps
Oct 2010/Feb 2011 131 bps
May 2013/Sep 2013 127 bps
Oct 2013/Dec 2013 54 bps
Aug 2014/Sep 2014 27 bps
Net Change Jun 2007/Present -269 bps
Sep 2004/Present -190 bps

What struck me as I looked at this data for the first time was the number of times since this current bull market began we have seen sharp increases in interest rates in an overall declining interest rate environment. The US 10-year yield peaked at 5.3% mid-June 2007 and has since fallen 269 bps to Friday’s close of 2.6%.

I then examined the performance data of some of the key market indexes and sectors. I will start by addressing those sectors/indexes that underperformed. Not surprisingly, long-term bonds performed worse than any other sector or index I evaluated. I say not surprisingly, because historically long-duration bond valuations are the most sensitive to rate increases or decreases. As rates increase, prices drop; and vice versa.

The Real Estate and Utilities sectors also tended to underperform during the evaluated periods. Since the Real Estate and Utilities sectors are comprised of stocks, the performance of these sectors was a bit uneven and difficult to draw any firm conclusions other than rising rates tends to hurt these sectors. My general view is that investors who need yield to pay their living expenses or otherwise are seeking income from their portfolio will purchase utility and real estate stocks to get that income, but as soon as rates rise to a certain level, they will sell their riskier stocks and buy the bonds for their income. I might go so far as to suggest this happens with other high dividend yielding stocks as well—but to a lesser degree.

What did surprise me a bit was how poorly the Emerging Market region did during the rising interest rate periods with the exception of the Dec 2008/Jun 2009 period where they were the best sector. The Emerging Market sector tended to be at or near the bottom of all the other periods evaluated and this most current rising interest period is no exception.

It is more difficult for me to draw any trends on those sectors or indexes that have tended to do well in rising rate environments other to say that stocks clearly outperformed bonds. No one sector or index dominated in any one period over another. Looking at the entire period of December 22, 2008 to Friday (net rate increase of 48 bps), the Consumer Discretionary sector outperformed all others followed by Information Technology. The NASDAQ and the S&P 500 Equal Weight indexes are third and fourth respectively. All of these four stellar performing sectors/indexes exceed a gross return of over 200%.

In summary, during the major rising interest rate environments over the past decade:

• Stocks, in general, are likely to outperform bonds
• Interest rate sensitive stocks and sectors may tend to underperform
• Be wary of the Emerging Market sector


LOOKING AHEAD

September is living up to its reputation for being weak month for stocks.

Nothing has changed my overall view that the US economy is the strongest in the world and that US equities are favored over all other major asset categories. The August Employment report released on September 5th concerned many investors, but I see it more as an aberration rather than a new trend. Although the International asset class remains firmly number two of the six I follow on a relative strength basis, I continue to recommend under-weighting.

Rising interest rates make bond investing tough. For pure preservation, the very short duration bond sector may work. If income is still important, I like the senior floating rate sector.

The Money Market sector score currently stands at 1.53 up from 1.48 at the end of August, and now ranks at 128 out of 134 up from 131st. Falling below the Money Market over the past two weeks are the Global Currency, Commodities, and Precious Metals sectors.

If you have any questions or comments please reach out and give me a call.





Paul L. Merritt, MBA, C(k)P®, 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 Dow Jones Global ex-US index represents 77 countries and covers more than 98% of the world's market capitalization. A full complement of subindices, measuring both sectors and stock-size segments, are calculated for each country and region.

MARKET UPDATE AND COMMENTARY
September 1, 2014

Key US stock market indexes finished up nicely in August despite the continued global turmoil. The Dow Jones Industrial Average (DJIA), S&P 500, and NASDAQ indexes posted their second best monthly returns of the year gaining 3.2%, 3.8%, and 4.0% respectively in August. The struggling small capitalization-heavy Russell 2000 had its best monthly gain (4.9%) helping to push this beleaguered index into positive returns for the year. Eight months and 35 trading weeks into 2014, the DJIA is up 3.1%, the S&P 500 has gained 8.4%, the NASDAQ leads with a 9.7% gain, and the Russell 2000 is up 0.9%.

I believe a number of factors contributed to August’s performance including continued growth in corporate profits, a 4.2% quarterly growth rate in the Gross Domestic Product (GDP), and flagging economic growth elsewhere. With concerns of political instability abroad and a very modest sustained economic recovery here, more and more investors appear to be “buying American.”

August was a positive month for most international indexes led by a 4.0% increase in the Americas region and a 2.5% improvement in the Emerging Markets region. The Asia/Pacific region and the European-dominated STOXX 600 indexes were the weakest in August with returns of 0.3% and 1.8% respectively. For the year, the Emerging Markets region leads my international indexes with a 9.8% gain followed by the Americas region with a gain of 8.4%. The STOXX 600 lags other international indexes with a yearly gain of 4.2%. European economic performance is starting to sag yet again, and coupled with the troubles in the Ukraine, I believe further weakness may lie ahead for the Euro Zone.

Interest rates continue to fall leaving economists and pundits scratching their heads. Both the US 10-year and 30-year Treasury yields fell almost a quarter percent in August closing Friday at 2.34% and 3.08% respectively. It was widely anticipated at the beginning of the year that with the Federal Reserve purchasing fewer bonds and an economy forecast to grow above 3% in 2014; interest rates would have to rise. This has led to a new debate among the chattering financial press: how can stock investors and bond investors’ view of the markets/economy be so opposite? Stock indexes are at or near all-time records while low interest rates signals pessimism. In my opinion, they may both be right given their frames of reference. I will address this further below.

Weakness in commodities continues. The Dow Jones UBS broad commodity index fell 2.1% in August reflecting the continued pullback in commodity prices. Natural Gas posted a 6.4% gain as WTI Oil fell 2.0% and Corn fell 0.6% but for now seems to be stabilizing. Another factor contributing to growing commodity price weakness that I have not discussed in sometime is the impact of a strengthening US dollar on commodity prices. All else being equal, the stronger the US dollar, the lower commodity prices; and the US dollar has gained against most other currencies recently.

THE THREE GOLDEN WORDS

When I was studying for my MBA at the University of Cincinnati, I was compelled to take several courses in macroeconomics. I say compelled, because I never found sitting through multiple 3-hour lectures in grad school discussing graphs like the ones to the left particularly enjoyable. This does not mean that I did not understand or diminish the importance of such topics as monetary policy, GDP, the differences between real and nominal data, and the interaction of government fiscal policies on labor and the economy, I did. However, I grew to understand that macro economists, in my opinion, were trying to use very advanced mathematics to predict something that in the end was unpredictable — human behavior.

I believe simplicity is the foundation of understanding the complex, and frequently the complex can be broken down into very basic and understandable truths. Macroeconomics is no different. The foundation of all economics can be summed up into three words, my “golden words” of economics: SUPPLY AND DEMAND.

Any product bought or sold has a value. The perceived value is determined by the buyer and seller based upon their own criteria of value. Let me use an example to explain.

I am a big fan of Pawn Stars on the History Channel. If you watch the show for more than five minutes, you will see the value of articles such as books, guitars, autographs, cars, and even a 1920’s-era drink mixer negotiated. It is particularly intriguing when a seller walks into the store with an object they believe is worth a great deal of money because of age or of because of research they did on internet only to be told by the store’s owner, Rick Harrison, that the object is worth far less than the seller’s perceived value. Rick uses his experience to assess how much demand he can expect for the object, at what price that demand exists, and what profit margin he must make for the risk he is assuming with the purchase. Rick has a different set of criteria by which he values items compared to the sellers. Ultimately, the value of the object is determined when Rick and the seller reach an agreement on price, and that price becomes the value of the item at that moment in time.

What happens on Pawn Stars is happening millions of times each day when buyers and sellers in the financial markets come together to trade. What I think is important to put this discussion into context of today’s seemingly confused behavior in the stock and bond markets is to understand the criteria by which buyers and sellers bring into the financial “store.” Stock investors focus on corporate profitability and expected growth. I have noted a number of times that US companies are as profitable as ever and stock valuations have risen because of this profitability. Arguably, the US continues to be the most vibrant and growing entrepreneurial economy within politically stable boarders of any country in the world. The demand for US stocks remains strong.

Bond markets are also reflecting this same strong demand but due to a mix of similar and also different reasons. First, the stability of the US makes it the go-to place for international bond investors just as it does for stock buyers during periods of global uncertainty. With the political turmoil in the world today, investors are seeking the perceived safety of US bonds. Second, interest rates indicate slow, plodding growth going forward. However, when an investor has a choice between a German 10-year Bund yielding 0.98% or 2.34% on a US 10-year Treasury, which bond do you think an investor would buy today? Of course, the US 10-year. Finally, even though US growth is somewhat anemic, most other regions of the world are doing worse. Therefore, higher US interest rates are more likely than in other similar countries such as Germany or France, in my view.

Confirming international investor demand for all things US, the US dollar has risen sharply compared to other currencies. The US dollar index is up 4.9% since May 8th of this year, and if the European Central Bank (ECB) adopts more aggressive US-style Fed intervention, the Europeans may likely see even lower interest rates and a weaker Euro ahead.

The supply and demand dynamic affecting currencies has an interesting role on commodity prices. Over 90% of all commodity purchases in the world occur with US dollars. If the US dollar gains strength compared to other currencies, commodity prices increase for non-US dollar buyers. Higher prices tend to dampen global demand and with less demand come lower prices. Gold, a safe haven for a weaker US dollar, also tends to lose value as the US dollar strengthens. Watching currency exchange rates gives an indication of which currencies are in demand and which are not.

In summary, stock investors see profitability and bond investors see slow growth; US stocks, bonds, and dollars are in demand by both domestic and international buyers. The motivations and perceptions of value may differ between the investment asset categories; however, the net result is higher valuations for most US assets.


LOOKING AHEAD

September has traditionally been considered the weakest month of the year. My friends at DorseyWright & Associates put together some interesting historical data for the month of September.

Looking back 86 years, the S&P 500 has been positive 39 times (45.3%) in the month of September. Of the 39 positive months, the S&P 500 has gained an average 3.4% while it has lost 4.8% in the 47 down Septembers.

I share this information with you because I have seen a number of articles popping up in the financial media discussing the perils of September markets. Putting aside the noise, history suggests that having an up or down September has about the same odds of correctly picking heads or tails on a coin flip.

Here are some very general observations I will offer based upon my interpretation of what I have read and the data I have reviewed:

• Economic fundamentals remain positive. The economy is growing, albeit slowly.
• The S&P 500 is just slightly overvalued in comparison to long-term valuations, and on a ten-week average, it is overbought by 47% well within acceptable levels.
• Risk is personal. If you are uncomfortable with your stock exposure, make some sales and increase your cash for now.
• Small capitalization stocks are expensive relative to large cap stocks, so if you are going to sell any US stocks, I would suggest considering small caps first.
• European stocks are cheap relative to US companies, but I think they are cheap for a reason—their economies are weaker than the US. I like many companies found in Europe, but I would not rush out of US stocks and into European or Asian stocks at this time. I continue to underweight Europe to the US.
• The Federal Reserve may raise rates sooner than people expect, but I believe that this will be a positive sign over the long-run after some short-term turbulence as investors adapt to new monetary policies.

US stocks are still the preferred major asset class I follow. International stocks have strengthened slightly in the number two position followed by Bonds, Currencies, Commodities, and Money Market. Commodities and Money Market are taking turns deciding which major asset category will reside last in the rankings. The Money Market category score is presently 1.48 out of 6.0 and ranks 131 out of 134 DorseyWright categories indicating that nearly every DorseyWright category is outperforming the Money Market category on a relative strength basis.

Predicting major market moves is difficult at best and a fool’s errand at its worse. Stay focused on the underlying data and remain committed to your strategy over the long run.

If you have any questions or comments please reach out and give me a call.





Paul L. Merritt, MBA, C(k)P®, 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 Dow Jones Global ex-US index represents 77 countries and covers more than 98% of the world's market capitalization. A full complement of subindices, measuring both sectors and stock-size segments, are calculated for each country and region.

MARKET UPDATE AND COMMENTARY
August 17, 2014


Markets and global events collided during the past couple of weeks creating uncertainty in investors. The Ukrainian situation in particular put markets on edge and increased volatility in the markets. Bond yields, especially in Europe, fell as investors reacted to both geopolitical events and a weakening Euro Zone economy. However, after a disappointing July, many investors experienced a respite with most major equity indexes improving during the first two weeks in August.

The Dow Jones Industrial Average (DJIA) is up 0.6% for the month and has yet again turned positive for the year (0.5%). The broader S&P 500 has shown even stronger performance gaining 1.3% so far in August and 5.8% for the year. The technology-heavy NASDAQ index is the best performing of the major indexes with a gain of 2.2% for the month and 6.9% for the year. The small capitalization Russell 2000 remains the only significant index I track that is still negative for the year losing 1.9% despite gaining 1.9% so far in August. A lagging Russell 2000 index has put this index behind the S&P 500 and S&P MidCap 400 indexes on a trailing one and three year basis for the first time in quite a while.

International markets traded higher as well in August. The Developed Markets and Asia/Pacific regions are up 0.2% in August. The Emerging Market region added 1.2% and the Americas region added 1.3%. For the year, the Emerging Market region leads all other major international indexes with an 8.6% return. Much of the strength in the emerging markets is due to a very solid performance in India (+23.3%) in 2014.

I would venture to guess that the biggest surprise for most economists so far in 2014 has been the steady decline in interest rates. The US 30-year Treasury yield has fallen from 3.97% to 3.13% (84 basis points) and the US 10-year Treasury yield has dropped from 3.03% to 2.34% (69 basis points). This drop in interest rates has pushed the Barclays S Aggregate Bond index up 4.9% this year. As I have said before, I am not happy about the fall in interest rates because of the ramifications on investor behavior (pushing conservative investors into riskier investments), and because of the message it is signaling about future economic growth (not good). However, I do believe that much of the recent demand for Treasuries (and other sovereign debt) is due to investor fears over the increasingly unstable international geopolitical situation.

Commodities continue to lag across most sectors. For the year, Gold is up 8.6%; however, I would not use gold as an indicator of other commodities. I believe gold is much more of a hedge against political and monetary uncertainty. A place for fearful investors to put cash. Most other commodities reflect the more normal supply and demand relationship I expect to see in commodity prices. The Dow Jones UBS Commodity (DJUBS) index is a broad basket index that includes agriculture, energy, metals, and livestock components and gives investors some idea of how commodities in aggregate are performing. Year-to-date, the DJUBS Commodity index is virtually unchanged; however, the index has fallen nearly 8% since the end of June. Double-digit declines in hogs, soybeans, cotton, natural gas, and corn have all contributed to this broad commodity pullback. WTI Oil has fallen 1.2% for the year even in the face of tensions in the Middle East.

WILL SHE OR WON’T SHE?

The latest fear in the rarefied circle of economists (excluding the current geopolitical situation) is whether or not Fed Chairwoman Janet Yellen will wait too long to raise interest rates. A lead story in the Wall Street Journal today (August 17th) postulates that many economists are growing concerned the Fed may lose the initiative on dealing with inflation if Yellen waits too long to begin raising rates. The basis of their argument is that the unemployment rate has fallen faster than expected and that as the slack is taken out of the labor market, wages will start rising and inflation along with it. Does the Fed raising interest rates early next year, mid-year, or late next year really matter? My answer is no, not over the long-term. What matters is how strong our economy is and will be.

My views of the debate mirror those of First Trust Chief Economist Brian Wesbury. He recently described the US economy as essentially two economies—the productive/entrepreneurial economy and the destructive/governmental spend and over-regulated economy. He cites the exploding growth of technology and its positive impact on virtually every aspect of business. This is not a new story. Technology has pushed economic activity and productivity since the advent of the personal computer in the early 1980’s. Today is no different although some of the technologies are. Technology-fueled growth is here today. Unfortunately, government has been working to curtail growth through increased wealth transfer payments and regulations that holds back economic growth. The Environmental Protection Agency’s (EPA) expected ruling reducing the amount of permissible ozone in the atmosphere immediately comes to mind (see Jay Timmons’ August 13th Wall Street Journal letter for a detailed explanation). Let me be clear, I am not taking political sides nor am I advocating a return to the 1970’s when the air was brown in many cities and lakes burned. I am stating that what the government does with regards to taxation, regulation, and laws either contributes or takes away from economic growth, and in my view the government’s action can and is causing a drag on the economy. Today the productive part of the economy is winning, but just barely. I believe this is one of the key factors why the Gross Domestic Product (GDP) has limped in around 2% annually since the Great Recession ended.

You may ask what does this have to do with Janet Yellen? It matters because she is in the position of trying to support a struggling economy through monetary policy. I believe that low interest rates have helped somewhat in encouraging borrowing by businesses and individuals; however, a struggling housing sector remains hampered by factors other than high interest rates. Low interest rates have also helped the Federal government meet its debt obligations which in turn has, for now, postponed the prospect of another budget crises. Ms. Yellen’s decision to start raising interest rates will be driven by her ability to determine when the US economy has strengthened to the point that monetary stimulus is no longer needed. If Ms. Yellen gets it right, the economy will be on solid footing and that will be the real story when she starts raising interest rates and that is good news.

Because of the tremendous uncertainty surrounding the debate on raising interest rates, I hope Ms. Yellen will adequately telegraph her moves to the markets minimizing surprise. I have a couple of key thoughts for you to consider as this debate continues:

 Interest rates remain historically low
 Predicting interest rates is a very inexact science and no one does it well regularly
 At some point the Fed will raise rates, when is anybody’s guess
 The markets may suffer an initial pullback as investors revalue their investments based upon future interest rates
 Stock prices are about corporate profitability, not Fed interest rate policy

Remember that over the long-term markets adapt. Investors will adjust strategies based upon all the known information at the time. I believe investors should invest and not try to predict what the Fed will do month-to-month. There may be more clarity on this subject in the future, but for now, who knows. We will cross that proverbial bridge when we get there. What ultimately matters is the strength of the economy.


LOOKING AHEAD

It is evident that uncertainty is every where these days. Europe, the Middle East, and Ebola concerns in Africa highlight just a few of the more dominant headlines. Uncertainty breeds volatility in markets and I believe we will continue to see nervous markets react to headlines as they break. I also believe the crisis in the Ukraine currently poses the greatest near-term threat (or relief) to markets, but trading on such geopolitical concerns can be a risky one. In Europe I am more concerned about stagnate or shrinking growth.

All of my key DorseyWright & Associates key indicators strengthened over the past couple of weeks. US stocks remain solidly in favor. International stocks actually improved slightly on a relative strength basis mostly on the gains in certain emerging markets. Bond prices clearly improved as interest rates pulled back, and commodity prices continue to slide. This last point about commodity prices is important because food prices are likely to fall as lower pork and grain prices work their way through food distribution channels. A fall in energy prices should help everyone at the gas pump.

The markets are unsettled for sure. It is very tempting to run away from good investments on the basis of all the doom and gloom in the media; however, at times like this it is important to stay focused on the bigger picture. Corporate profits and a



growing economy drive markets, and that is what I care about.




Paul L. Merritt, MBA, C(k)P®, 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 S&P MidCap 400® provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500®, measures the performance of mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment. 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.

MARKET UPDATE AND COMMENTARY
August 3, 2014


It has been a number of weeks since my last Market Update and Commentary and it is time to get back to my regular schedule. First, I would like to say that during part of my writing absence I traveled to Ireland and Scotland with my wife, Virginia, and some of my dearest friends Toliver and Jeanette. A trip to the land of my ancestors has always been on my bucket list. I was thrilled to make the journey and I came home with some fabulous memories and impressions. First, Ireland and
Scotland are countries of immense beauty. Both countries are rustic, green, and lush. Irish communities are very different than other European countries I have visited in that the Irish did not build village clusters, rather their homes are scattered throughout the countryside. Dublin was actually a Viking settlement not Irish; and I learned that Irish redheads, like my daughter, all have their origins from the Vikings. Second, the Irish are fiercely independent. Irish independence is not yet 100 years old and the struggle to gain their autonomy from England is still very much in the public discourse. Third, the food was not nearly as bad as I was told it would be, not fabulous, but not bad. This leads me to my final observation and that is the Irish, and Scottish, people are every bit as friendly as you hear. Everyone we encountered was genuine and welcoming. All in all a great trip.

For the first part of the summer, the markets have been indifferent. This has followed a theme that has persisted through much of the year. The financial media has been obsessed with the notion that the markets were at the top of a bubble and we are poised for a major correction. Last week certainly felt terrible with the Dow Jones Industrial Average (DJIA) losing 467 points (-2.75%) and the S&P 500 falling 53 points (-2.69%). The weekly performance was the second worst week of the year for the DJIA and the worst week for the S&P 500. However, when you stand back and put all of this into perspective, the markets are flat to up slightly for the year. I have written many times in previous Updates that markets do not move steadily higher and that pullbacks are a very common aspect of investing. That 5% corrections have historically occurred between 2 and 3 times each year. This is fact and yet no matter how many times you might have experienced a small or large correction, it always feels terrible. Therefore it is imperative to not lose sight of the goal of most investors and that is strive for long-term gains to support a future lifestyle.

I would also suggest that the markets have actually done pretty well considering the unsettling turmoil that has gripped the world stage. Investors do not like the uncertainty global events can bring into markets and given the ever increasing connectivity of markets, seemingly isolated world events can have an impact on stock and bond prices here in the US. What I believe will have the greatest impact on future market performance in relation to the current global unease is whether or not investors believe the outcome of these key events (Ukraine and Israel/Gaza) will lead to a better business environment. Only time will tell on this point.

KEEPING IT ALL IN PERSPECTIVE

July was the second weakest month for the markets after January so far in 2014. January was, except for the Russell 2000, significantly worse than July. The DJIA was down -1.56% in July compared to -5.30% in January. The S&P 500 was down -1.51% in July compared to -3.56% in January. The Russell 2000 gave back -6.11% in July compared to -2.82% in January. For the year, the DJIA is has lost just 13 points (-0.08%) from where it started 2014. The S&P 500 is up 4.45%, the NASDAQ is up 4.63%, while the Russell 2000 has fallen 3.74%. Given the rather uninspiring results of the major equity markets both here and abroad, I find it interesting that so many pundits keep asserting the markets are in a bubble. Bubbles come when markets keep going up and up and up. I do not see that pattern here. Furthermore, I do not hear any clamor for investors to jump in and start buying stocks because they might miss the next big move upward. What I believe is happening is that the markets have paused and are reflecting the fifth year of sluggish growth in the economy.

The Gross Domestic Product (GDP) has averaged 2.1% growth over the past five years. This year is no different with the 1st Quarter registering in at -2.1% and the 2nd Quarter rebounding to 4.0%. The recovery continues to be the slowest in the modern era. It is also the longest, but that is due, I believe, to the very sluggish nature of the recovery. I also believe that the decline in workforce participation has also helped keep wages down. The markets recovered, in my view, in the previous years because US companies adapted to the post-recession economy and made money surprising many investors. I will concede that a very accommodative Federal Reserve keeping short-term interest rates at near 0% for five years has certainly helped companies. However, I do not believe that the Fed is primarily responsible for current market valuations as many bearish pundits suggest.

It is necessary, I believe, to keep the bond markets included in the discussion of markets and valuations. Keep in mind that the Federal Reserve does not control all interest rates. They set the overnight lending rate and they influence rates through monetary policy (overnight interest rate and the supply of money). The supply of money is extremely important because the more of anything will cause the price to go up (inflation) as you have more dollars chasing the same goods. I have noted previously that the supply of money is not expanding at an above average pace which has kept inflation expectations down.

Investors determine the yield on bonds based upon credit risk, growth expectations, and inflation expectations. US Treasuries are unique in that they are considered to be risk-free because no one expects the Federal government to default. Therefore, when looking at the current yields on Treasuries investors consider just growth and inflation expectations over the period of the bond. That is why I routinely refer to the 10-year and 30-year US Treasury yields as the bond markets’ view of future growth and inflation. Today, the 10-year yield is 2.50%. When you factor in inflation and growth, it does not offer a very optimistic view of future growth rates but it also does not imply that inflation will be running out of control anytime soon.

Another important consideration is what impact low interest rates have on investors. With interest rates historically low for so many years, investors who are seeking income may have been forced to invest in securities that might be considered too risky in normal interest rate periods. Examples of this behavior include investments in high yield bonds, real estate, and utility stocks--equity or equity-like investments by investors who would rather invest in a good old-fashioned boring bonds. As demand for these securities increases, so do the prices. If rates do start jumping upwards, conservative investors may sell higher risk assets in favor of more traditional bonds causing prices in the higher-risk assets to fall.

So as I look across the investment landscape I see a view virtually unchanged in 2014, and I believe the markets are seeing the same. Economic growth is continuing at a very modest pace, inflation remains under control (this can always change and must be watched carefully), monetary policy is expected to be the same for at least the next 9 to 12 months, and I believe there is virtually zero likelihood that the fiscal policy coming out of Washington will change this year. So put the recent moves of the market in proper context as part of the natural ups and downs found in typical markets.

LOOKING AHEAD

The recent sell-off in the markets has pushed down a number of key technicals that I follow. The New York Stock Exchange Bullish Percent (NYSEBP) fell from a very bullish 69.25 to a more moderate 62.35 in July. The first trading day of August saw the NYSEBP fall another 2 points to close at 60.35. This key DorseyWright indicator is also in a defensive posture indicating the potential for some weakness ahead. I believe that if the markets continue their recent pullback, I would expect the reading (and markets) to fall a bit further.

US Stocks continue, however, to be favored on a long-term basis followed by International Stocks. These major asset categories remain the #1 and #2 of the six asset classes I follow. Bonds are third, Currencies and Cash are tied at fourth and fifth, and the Commodity asset class remains in last position.

Looking more closely at US Stocks, the S&P 500 is currently 35% oversold. Anything closer to 100% oversold and beyond would make an attractive entry point for new cash. According to The Wall Street Journal, the trailing 12-month S&P 500 Price/Earnings (P/E) ratio is currently 18.80 with a dividend yield of 1.93%. The 18.80 P/E level is slightly elevated over the long-term average of 15.7.

The International stock asset class ranks number two of the six major asset classes. The European-heavy STOXX 600 lost 1.72% in July putting its loss slightly greater than the DJIA and S&P 500. The Emerging Market region gained 1.67% while the Developed Market region lost 1.25%. The Emerging Market region has been the best performing International sector that I track gaining 6.81% year-to-date. I like this sector, however, not all emerging markets are the same and great care must be taken in gaining exposure in this area.

Bonds continue to fall below stocks on a relative strength basis, however, most bond sectors have performed well so far in 2014. The Barclays US Aggregate Bond Index is up 3.91% for the year as interest rates have generally fallen throughout 2014. Falling interest rates pushed longer maturity bond returns higher making long-term bonds the best performing bond category so far in 2014 (long maturities are also more vulnerable to rising interest rates). The High Yield and Bank Loan bond sectors are currently the most oversold standing at -159% and -173% respectively. Even with the recent sell-off, nearly all bond sectors are positive for the year.

Commodities have lost a lot of strength in the past couple of months. The Dow Jones UBS Commodity index (a broad basket of different commodities) has fallen 5.6% since the end of June and is now up just 1.1% for the year. Oil and Gold tend to be the most reported commodities on the daily news and WTI Oil is down 0.7% for the year while Gold is up a healthy 7.6%. What investors should keep in mind is that Gold is currently $657 (-33.7%) below its all-time high of $1952 reached in August 2011. I do not believe Gold will see a return to the 2011 prices as long as the Federal Reserve keeps the supply of US Dollars within an appropriate growth rate (about 6%) as it transitions into a new era of monetary policy next year. It is important that investors keep in mind that commodities typically trade in a supply and demand environment and if demand falls or supply grows, prices are likely to fall as well.

While I am going to approach the next couple of weeks with caution, I am not going to start selling stocks for selling’s sake. I will be looking very closely at the various DWA technicals that I use to make buy and sell decisions and I would anticipate that some of the weaker relative strength ranked securities will be trimmed. I have learned over the years not to get to heavy handed in trading on down markets, but rather be selective and thoughtful in selling decisions. This time is no different.




Paul L. Merritt, MBA, C(k)P®, 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 Dow Jones Global ex-US index represents 77 countries and covers more than 98% of the world's market capitalization. A full complement of subindices, measuring both sectors and stock-size segments, are calculated for each country and region.