MARKET UPDATE AND COMMENTARY

July 14, 2015

I had originally planned for this Update and Commentary to be a review of the first half of 2015.  I will certainly provide a brief review; however, I want to devote a little more space to the skirmish taking place between Greece and the EU due to the long-term ramifications the outcome this may have on the global economy.

Market performance in the US during the first half of the year can be summed up in one word: lackluster.  This is not the first time I have used this word, but again it fits.

Time Period	Dow Jones Industrial Average (DJIA)	S&P 500	Russell 2000	NASDAQ
First Quarter 2015	-0.26%	0.44%	3.99%	3.48%
Second Quarter 2015	-0.88%	-0.23%	0.09%	1.75%
First Half 2015*	-1.14%	0.20%	4.09%	5.30%
July-to-Date	0.80%	0.65%	-0.15%	-1.64%
Year-to-Date	-0.35%	0.86%	3.93%	5.52%

Source:  The Wall Street Journal (Past performance is not indicative of future returns).  As of market close July 10, 2015.

*As of market close June 30, 2015

The Morningstar^®size/style chart is another way to evaluate US market performance through the first six months of the year.  Morningstar^® is a third-party private company that provides a wide variety of performance data, and they are best known for their work on mutual funds and their star ranking system.  Morningstar^® also developed the size/style matrix which divides returns between stocks that fall into one of nine different boxes.  The boxes are divided into market capitalization/size (a company’s market value) and the company’s style (growth, value, or blend).  The boxes below illustrate the returns by box size/style:

Upon quick observation it is clear that growth has outperformed value or blend, and Small and Mid Capitalization stocks have outperformed Large caps.  This is a change from the last year or two where the S&P 500 index (Large cap blend) handily outperformed the other size/style boxes.  The most likely reason for this change in leadership in 2015, in my view, is the result of a stronger dollar and its negative impact on the profits of large, multi-national companies that tend to dominate the Large cap space.  As the US Dollar continues to show strength relative to other currencies, I believe Small and Mid Capitalization stocks (which typically drive most of their profits from the US) will continue to outperform their larger brethren.  Additionally, large US multi-national companies may also be perceived as more vulnerable to the turmoil in Greece and China further hurting profits and/or stock prices.

Performance of the S&P 500 sectors and Real Estate is interesting as well.  As you can see by the chart below, the Health Care and Consumer Discretionary sectors have performed well above the S&P 500 index average while Utilities and Real Estate have significantly lagged all other sectors.

I believe performance in the health care sector has been greatly assisted by the biotechnology subsector.  The biotech subsector continues to advance at a stunning pace due to outstanding technological developments which are likely to be converted into strong earnings.  I also believe that the Health Care sector is going to continue to be a strong sector as the baby boom generation ages and their demands upon this sector grow.  I think the continuing rise in interest rates is the likely culprit for the underperformance of the Utilities and Real Estate sectors.  The Energy sector continues to suffer following continued supply/demand imbalances as oil production continues to grow in the face of static or declining demand.

Turning our attention to the international sector, I believe it is safe to say that the turbulence in the international sector has been dramatic.  The Greece problem continues in one form or another to make international investors nervous as has the recent sell-off of Chinese markets following huge market gains over the 12 months (+89%).

Despite all the fear and uncertainty by investors the data does not reflect such dire outcomes:

Time Period	Global Dow xUS	STOXX 600	Dow Jones Devel Mkt Region Total Stock Market	Dow Jones Emerg Mkt Region Total Stock Market
First Quarter 2015	3.08%	15.99%	2.23%	1.39%
Second Quarter 2015	0.14%	-4.02%	-0.10%	0.70%
First Half 2015*	3.22%	11.32%	2.13%	2.09%
July-to-Date	-0.99%	1.98%	0.15%	-3.90%
Year-to-Date	2.20%	13.50%	2.28%	-1.89%

Source:  The Wall Street Journal (Past performance is not indicative of future returns).  As of market close July 10, 2015.

The losses in the Emerging Market region are primarily due to the recent and substantial drop in Chinese markets.  As I have addressed before, China makes up 29.4% of the Dow Jones Emerging Market TSM index so has a disproportionate influence on this index’s return.  Chinese markets have rallied over the past couple of days due to unprecedented government intervention into domestic markets.  I am very skeptical of Chinese markets at this time and believe that fears over a Chinese market correction hurting US and other international markets are overstated.  After a terrible 2^nd quarter, the European-dominated STOXX 600 index has rallied on news that Greece has agreed to the terms of the European Union.  While I prefer US markets, I do believe that exposure to European and other developed markets is appropriate to some degree.

The trend towards higher interest rates has been in place since early February.

 

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I believe this rise in interest rates is in anticipation of the Federal Reserve raising rates later this year, and because growth and inflation are slowly easing back into the economy.  The impact of rising rates has been to push down the Barclays US Aggregate bond index over -1.6% since early February, and year-to-date (YTD), the Barclays is now down -0.44%. 

The bond asset class remains one of the most challenging to invest in.  According to Morningstar^® as of July 10th, the best performing bond sectors YTD are Bank Loans (2.61%), High Yield Bond (2.33%), and Preferred Stock (2.09%).  At the other end of the performance spectrum, Long Government (-4.41%), Long-Term Corporate (-3.72%), and the World Bond (-2.55%) have underperformed.  I have no doubt that the challenges in the bond asset class will continue especially as investors try to navigate the prospect of higher short-term interest rates from the Federal Reserve.

THE GREEK SKIRMISH

I am going to fall back on some of my military experience to try and find the appropriate analogy to describe what is happening with Greece and the European Union (EU).  I believe what we are seeing is a skirmish between the vanguard of two great global economic armies.

For most, you may be asking yourself, what is a skirmisher?  A skirmisher is a soldier who goes out in front of the main army to find the opposing army.  Their job is to gather intelligence, identify the location of the main army, to find any weaknesses that may be present, harass, and deceive.  They traditionally fight the first battle of any major engagement and the success or failure of the skirmishers contributes significantly to the outcome of the main battle.  The economic fighting going on between the EU, essentially Germany, and Greece is a skirmish in front the global economic armies of Entrepreneurism and Socialism.  How the skirmish concludes will, I believe, have an important impact on the future battles between these two competing global economic armies.

The world is finding itself more and more divided between entrepreneurial/capitalistic countries and socialist countries.    I still like to think of the United States as the leading force in the entrepreneurial world, while countries like Greece are old, inefficient, welfare states where the government is the primary consumer/employer for that country.  Entrepreneurial countries have less regulation, flexible job markets, lower government deficits, and place a high value on private ownership and responsibility.  Socialist countries have consistently low growth, inefficient labor markets that are encumbered with parochial interests and protectionism, high levels of government employment, high per capita GDP spending by government, and unsustainable debt.  These are the two forces that appear to be arraying themselves for battle in the years to come across the globe.

Greece is broke and can sustain the status quo only by spending other people’s money—notably Germany’s money.  They have a society that is heavily dependent upon the government for their livelihood.  Right behind Greece is France, Italy, Spain, and Portugal.  These countries have many similarities to Greece, but for now, the governments of those countries are trying to become more entrepreneurial and grow their economies in order to sustain themselves.  Fears over the “contagion” in Europe has been that if the socialist elements of these weaker European states see Greece succeed in extracting highly favorable terms in their standoff with the EU, the other member states will demand similar concessions.  The Germans, who also happen to be the largest holders of Greek debt and the debt of the other EU socialist countries, are attempting to bring/force an entrepreneurial culture to Greece.  If Germany and the EU succeed, I believe this will play out favorably in the years ahead with other indebted countries.  If Germany fails, then it is only a matter of time, in my view, to see more years of stagnate growth and rising levels of unemployment sweep through the old socialist countries.  The agreement reached late this past weekend is a step in the right direction; however, it is too early to tell if Greece will in fact tilt more towards an entrepreneurial culture.

While I have said that I believe the US is clearly the force behind the entrepreneurial global army, we have a number of pockets at home that are beginning to look like Greece.  Detroit, Chicago, Illinois, California, New York, and New Jersey are all afflicted by some of the same characteristics found in Greece.  There are many factors that are different that mitigate much of what is going on here; however, unless significant fiscal policy changes are made (i.e. flexible labor policies, less government spending, and better education), these governments will soon find themselves facing some type of debt crisis or even bankruptcy.  This is why I believe what is happening in Europe today is so critical.  Either the entrepreneurial skirmishers will lead their army to a successful campaign for economic growth and prosperity for all, or greater economic pain will  be pushed into the future as socialism prevails.

LOOKING AHEAD

I said about three weeks ago that volatility was likely to pick up due to the fears over Greece and rising interest rates became more pronounced.  This has certainly come true.  The good news is that the markets have rallied enough in the past week or so to put them back into positive territory for the year (as of July 14^th).

The US stocks category is still the strongest of the six major asset categories I follow on a relative strength basis.  The other categories in order are International stocks, Fixed Income, money market funds, Currency, and Commodities.  The overall relationship among these six asset categories is unchanged over the past month or so when International stocks overtook Fixed income for the number two position mid-April.

Equal weight is still favored over capitalization weighted investments.  Growth over value, Small and Mid Capitalization over Large, and Health Care, Consumer Discretionary, and Financials are the top rated sectors based upon relative strength.  I might note that historically, financials have tended to do well as interest rates rise due to increased earnings potential.  The fact that financials have slipped into the third position on my relative strength chart may be the first sign of renewed strength of this sector.

Earnings season for the 2^nd quarter has begun.  I expect earnings to be improved but energy and multi-national companies may struggle somewhat due to a stronger US Dollar.  I further anticipate that when the government announces the first estimate of the 2^nd quarter Gross Domestic Product (GDP) on July 30^th we will see a an improvement over the previous quarter.  Over the next several weeks a number of key economic reports will be published that will certainly help guide investors and likely reinforce my belief that the economy will have strengthened in the 2^nd quarter.

While I hate predicting the Federal Reserve and interest rates, I do believe that the Fed will raise the overnight lending rate by a quarter of a percent (25 basis points) in the fall, and rates will continue to rise very slowly.  The Fed has signaled at this time that any increase in rates will be a result of “normalizing yields,”and not due to fears of an overheated economy.

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

Paul L. Merritt, MBA, C(k)P^®, AIF^®, CRPC®

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.

All indices are unmanaged and are not available for direct investment by the public.  Past performance is not indicative of future results.  The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poors and is a capitalization-weighted index meaning the larger companies have a larger weighting of the index.  The S&P 500 Equal Weighted Index is determined by giving each company in the index an equal weighting to each of the 500 companies that comprise the index.  The Dow Jones Industrial Average is based on the average performance of 30 large U.S. companies monitored by Dow Jones & Company.  The Russell 2000 Index Is comprised of the 2000 smallest companies of the Russell 3000 Index, which is comprised of the 3000 biggest companies in the US.   The NASDAQ Composite Index (NASDAQ) is an index representing the securities traded on the NASDAQ stock market and is comprised of over 3000 issues.  It has a heavy bias towards technology and growth stocks.  The STOXX^® Europe 600 is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index.  With a fixed number of 600 components, the STOXX Europe 600 represents large, mid, and small capitalization countries of the European region.  The Dow Jones Global ex-US index represents 77 countries and covers more than 98% of the world's market capitalization. A full complement of sub indices, measuring both sectors and stock-size segments, are calculated for each country and region.

Information in this update has been obtained from and is based upon sources that NTrust Wealth Management (NTWM) believes to be reliable; however, NTWM does not guarantee its accuracy. All opinions and estimates constitute NTWM's judgment as of the date the update was created and are subject to change without notice. This update is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities must take into account existing public information on such security or any registered prospectus.

Emerging market investments involve higher risks than investments from developed countries and involve increased risks due to differences in accounting methods, foreign taxation, political instability, and currency fluctuation. The main risks of international investing are currency fluctuations, differences in accounting methods, foreign taxation, economic, political, or financial instability, and lack of timely or reliable information or unfavorable political or legal developments.

The commodities industries can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. Past performance is no guarantee of future results. These investments may not be suitable for all investors, and there is no guarantee that any investment will be able to sell for a profit in the future.  The Dow Jones UBS Commodities Index is composed of futures contracts on physical commodities.  This index aims to provide a broadly diversified representation of commodity markets as an asset class.  The index represents 19 commodities, which are weighted to account for economic significance and market liquidity.  This index cannot be traded directly.  The CBOE Volatility Index - more commonly referred to as "VIX" - is an up-to-the-minute market estimate of expected volatility that is calculated by using real-time S&P 500^® Index (SPX) option bid/ask quotes. VIX uses nearby and second nearby options with at least 8 days left to expiration and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index.

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

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

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

Corporate bonds contain elements of both interest rate risk and credit risk. Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and if held to maturity, offer a fixed rate of return and fixed principal value. U.S. Treasury bills do not eliminate market risk. The purchase of bonds is subject to availability and market conditions. There is an inverse relationship between the price of bonds and the yield: when price goes up, yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income. 

 The bullish percent indicator (BPI) is a market breath indicator.  The indicator is calculated by taking the total number of issues in an index or industry that are generating point and figure buy signals and dividing it by the total number of stocks in that group.  The basic rule for using the bullish percent index is that when the BPI is above 70%, the market is overbought, and conversely when the indicator is below 30%, the market is oversold.  The most popular BPI is the NYSE Bullish Percent Index, which is the tool of choice for famed point and figure analyst, Thomas Dorsey.

MARKET UPDATE AND COMMENTARY

June 14, 2015

If I had to characterize US markets this far in 2015, I would have to say they have been pretty lackluster. As you can see below, the Dow Jones Industrial Average (DJIA) and the S&P 500 are flat. However, small capitalization stocks (Russell 2000) and technology stocks (NASDAQ) have bucked the trend with relatively good returns. I believe market performance can be attributed to three primary factors. First, despite the political spin found in most financial reporting, the dock strike and terrible weather in the first quarter really did take a toll on economic output. Second, worries about the Greece situation and when the Federal Reserve is going to raise interest rates have cut into stock gains. US large capitalization and dividend paying stocks and sectors have been particularly hard hit by rate hike fears. And third, small capitalization stocks, which have most of their earnings in the US, benefit when concerns about global growth arise. Technology stocks have done well, in my view, because they are the most entrepreneurial part of the US economy.

Source: The Wall Street Journal (Past performance is not indicative of future returns). As of market close June 14, 2015.

The three worst performing sectors year-to-date are Utilities (-9.9%), Real Estate (-4.3%), and Energy (-2.8%). Utilities and Real Estate are particularly sensitive to interest rate movements, and I believe that stocks within these two sectors are adjusting to the expected rise in interest rates. Energy stocks continue to struggle as uncertainty surrounds global demand and continuing strong production, especially in the US. Concerns about Iraq’s ability to produce in the face of ISIS attacks, and now the possibility of Iran bringing oil online if the sanctions are lifted as a result of talks between the US and Iran are also complicating pricing decisions by oil buyers. Finally, the strong US Dollar suppresses demand globally hurting profits in most major oil producers.

The best performing sectors are Health Care (+8.9%), Consumer Discretionary (+6.2%), and Materials (+3.3%).

After a very strong first quarter, international markets have struggled to go up. The European-heavy STOXX 600 index leads the major indexes I track with a year-to-date gain of nearly 14%. June, however, has been a different story as this index has pulled back 2.6%. I believe this is primarily attributable to the uncertainty surrounding Greece’s financial situation within the context of the European Union (EU). Greece is literally standing at the financial precipice and odds of this spendthrift country leaving the EU have increased. The Greeks must come up with €1.5 billion ($1.7 billion) for debt repayment before the end of June—money Greece simply does not have without further bailouts from the EU and International Monetary Fund (IMF). As it stands today, talks are at a standstill with both sides far apart in reaching an agreement. I fully expect these negotiations to go down to the very end. As I have said in previous Updates, it is not the size of the financial debt with Greece that is troubling to markets, but rather the uncertainty surrounding Greece’s exit from the EU and how other highly indebted EU countries may react to this development.

Source: The Wall Street Journal (Past performance is not indicative of future returns). As of market close June 14, 2015.

Turning to the emerging markets, the recent pullback in these markets has come as a bit of a surprise to investors. The consensus of the research I have done on this topic places the blame for recent weakness on a stronger US Dollar and rising US interest rates. While it is difficult to assign one or two problems across a broad swath of highly divergent economies found in the emerging market regions, most are vulnerable to capital flows (investment and lending by foreigners) and currency fluctuations. When the US Dollar rises sharply as it has done in the past six months, strains develop on the cost of capital and emerging market economies must compete for investment dollars by raising their interest rates ever higher. This action generally has the net effect of slowing down an economy, even to the point of causing recessions. All things being equal, most international investors would prefer to invest in a safer economy like the US. With rising interest rates here at home, investors may be shifting investments away (capital outflows) from more risky emerging markets to safer havens.

US interest rates have been rising. Since reaching a low of 1.67% on February 2nd, the yield on the US 10-year Treasury has increased 0.69% to 2.36%. This increase, in my view, has been a reaction of bond traders to the expectation that the Federal Reserve may raise rates later this year. This move is similar to the rise in yields from May to September 2013 when rates jumped 1.32% from a similar low of 1.62%. The impact on bond prices is predictable with many bond sectors showing negative returns during these periods of rising rates. However, keep in mind that losses are relative especially when compared to stock downturns. During the sell-off of bonds during the period cited in 2013, the Barclays US Aggregate bond index was down a little more than 4%. Since February 2nd of this year, the Barclays is down about 3%. Real weakness is in the longer duration bond sectors which experienced double digit loses in both periods. As tempting as it is to do, I simply cannot predict the direction and magnitude of interest rate changes. That is a fool’s errand. However, clearly there has been a shift this year to higher rates and the impact of this increase has hurt many bond sectors along with many dividend paying stocks.

MOVING CLOSER TO RESOLUTION OF TWO OF MY BIG FOUR

It is hard to determine which is causing the markets indigestion more—Greece or the Federal Reserve.

Either way, it does appear that clarity is coming on both of these important issues. First, the EU, IMF, and European Central Bank (ECB) all appear to be growing weary of Greece’s inflexibility in meeting creditor demands to cut pension spending and do more to raise revenues. What this means with regards to the eventual outcome with Greece is anyone’s guess; however, with a debt repayment deadline fast approaching, the political leaders in Europe must arrive at some resolution soon.

Second, the Federal Reserve is meeting this Tuesday and Wednesday. While the futures markets are telling us that the prospect of a rate increase by the Fed at this June meeting is virtually zero, all eyes will be watching the meeting announcement by Fed Chair Janet Yellen at 2 PM Wednesday followed by her press conference at 2:30 PM. What little consensus that does exist among economists suggests rates may be raised following the September or December meetings at the latest. I am hopeful that Wednesday’s announcement will help offer clarity to this prospect and the markets can move on.

As markets digest the resolution of these two key issues, I believe volatility will pick up. I think that as we get closer and closer to each major decision point, volatility will spike and then settle down as markets adjust to the new environment. I say this because I personally believe that the outcomes regarding both Greece and the Fed are going to be positive developments for the US and international markets. Certainty trumps uncertainty especially when the outcome is generally viewed as a positive.

LOOKING AHEAD

I believe I have made the case to expect more volatility in markets this summer and early fall. Do not be unsettled by this volatility, just understand it is part of the markets absorbing new economic realities.

The recent declines in most major US stock indexes has me looking at levels of support. For the S&P 500, 2080 is a very important near-term support level followed by 2050, and finally 1990. What each of these support levels indicate is when buying was re-initiated by investors following previous downturns, and they are a good indicator of investor sentiment this time around. Furthermore, it appears that the S&P 500 is just slightly oversold meaning prices remain fairly priced based upon their previous 10-weeks of trading.

The US stocks category is still the strongest of the six major asset categories I follow on a relative strength basis. The other categories in order are International stocks, Fixed income, money market funds, Currency, and Commodities. The overall relationship among these six asset categories is unchanged over the past month or so when International stocks overtook Fixed income for the number two position mid-April.

Equal weight is still favored over capitalization weighted investments. Growth over value, Small and Mid Capitalization over Large, and Health Care, Consumer Discretionary, and Technology are the top rated sectors based upon relative strength.

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


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

All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poors and is a capitalization-weighted index meaning the larger companies have a larger weighting of the index. The S&P 500 Equal Weighted Index is determined by giving each company in the index an equal weighting to each of the 500 companies that comprise the index. The Dow Jones Industrial Average is based on the average performance of 30 large U.S. companies monitored by Dow Jones & Company. The Russell 2000 Index Is comprised of the 2000 smallest companies of the Russell 3000 Index, which is comprised of the 3000 biggest companies in the US. The NASDAQ Composite Index (NASDAQ) is an index representing the securities traded on the NASDAQ stock market and is comprised of over 3000 issues. It has a heavy bias towards technology and growth stocks. The STOXX® Europe 600 is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 represents large, mid, and small capitalization countries of the European region. The Dow Jones Global ex-US index represents 77 countries and covers more than 98% of the world's market capitalization. A full complement of sub indices, measuring both sectors and stock-size segments, are calculated for each country and region.

Information in this update has been obtained from and is based upon sources that NTrust Wealth Management (NTWM) believes to be reliable; however, NTWM does not guarantee its accuracy. All opinions and estimates constitute NTWM's judgment as of the date the update was created and are subject to change without notice. This update is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities must take into account existing public information on such security or any registered prospectus.
Emerging market investments involve higher risks than investments from developed countries and involve increased risks due to differences in accounting methods, foreign taxation, political instability, and currency fluctuation. The main risks of international investing are currency fluctuations, differences in accounting methods, foreign taxation, economic, political, or financial instability, and lack of timely or reliable information or unfavorable political or legal developments.

The commodities industries can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. Past performance is no guarantee of future results. These investments may not be suitable for all investors, and there is no guarantee that any investment will be able to sell for a profit in the future. The Dow Jones UBS Commodities Index is composed of futures contracts on physical commodities. This index aims to provide a broadly diversified representation of commodity markets as an asset class. The index represents 19 commodities, which are weighted to account for economic significance and market liquidity. This index cannot be traded directly. The CBOE Volatility Index - more commonly referred to as "VIX" - is an up-to-the-minute market estimate of expected volatility that is calculated by using real-time S&P 500® Index (SPX) option bid/ask quotes. VIX uses nearby and second nearby options with at least 8 days left to expiration and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index.
TIPS are U.S. government securities designed to protect investors and the future value of their fixed-income investments from the adverse effects of inflation. Using the Consumer Price Index (CPI) as a guide, the value of the bond's principal is adjusted upward to keep pace with inflation. Increase in real interest rates can cause the price of inflation-protected debt securities to decrease. Interest payments on inflation-protected debt securities can be unpredictable.
The NYCE US Dollar Index is a measure that calculates the value of the US dollar through a basket of six currencies, the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona, and the Swiss franc. The Euro is the predominant currency making up about 57% of the basket.

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

Corporate bonds contain elements of both interest rate risk and credit risk. Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and if held to maturity, offer a fixed rate of return and fixed principal value. U.S. Treasury bills do not eliminate market risk. The purchase of bonds is subject to availability and market conditions. There is an inverse relationship between the price of bonds and the yield: when price goes up, yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income.

The bullish percent indicator (BPI) is a market breath indicator. The indicator is calculated by taking the total number of issues in an index or industry that are generating point and figure buy signals and dividing it by the total number of stocks in that group. The basic rule for using the bullish percent index is that when the BPI is above 70%, the market is overbought, and conversely when the indicator is below 30%, the market is oversold. The most popular BPI is the NYSE Bullish Percent Index, which is the tool of choice for famed point and figure analyst, Thomas Dorsey.

MARKET UPDATE AND COMMENTARY
May 17, 2015


US markets continue to struggle to find their footing in 2015 as continued sluggish economic data for April casts doubt on the strength of current economic growth. Some of the recent data cited as worrisome include Industrial Production (-0.3%), the Producer Price Index (-0.4%), and Retail Sales (0.0%). Offsetting some of the negative effects of weaker economic data was the April Employment Situation report that showed job growth rebounding in April to 223,000 new, non-farm payroll jobs created and the unemployment rate dropping 0.1% to 5.4%. The Federal Reserve generally considers an unemployment rate around 5% to be full employment.

Source: The Wall Street Journal (Past performance is not indicative of future returns). As of market close May 15, 2015.

The first quarter earnings season is wrapping up. As of May 8th, FactSet reported that with 89% of S&P 500 companies reporting earnings, 71% have exceeded the median estimated growth rate. This is better than many analysts projected; however, FactSet also suggested that part of this success was attributable to massive downward revisions early in the quarter that substantially lowered the bar for most companies. Energy companies in particular have suffered earnings declines more than any other sector. To get a perspective on what has happened in the energy sector, I examined the first quarter 2014 and 2015 revenue and net income data of the five largest energy companies (based on market capitalization) which are ExxonMobil (XOM), PetroChina (PTR), Chevron (CVX), Petrobras (PBR), and British Petroleum (BP). The combined quarterly revenues of these big five fell from $374 billion in Q1 2014 to $249 billion in Q1 2015, a drop of $125 billion (-33.4%). Net income fell from $22.6 billion in 2014 to $11.2 billion a drop of $11.4 billion (-50.5%). Numbers this large will have an impact throughout the economy, especially on Gross Domestic Product (GDP). The money not flowing to the energy companies is more money in the pockets of consumers, however, an improvement in consumer spending has yet to materialize.

Looking at sector performance, the Health Care sector continues to lead among the ten major economic sectors with a gain of 8.3% so far in 2015. Following the Health Care sector is Consumer Discretionary (+6.0%), and Materials (+5.6%). The Utility sector is lagging all others having lost 6.7% year-to-date. The Financial sector is down -0.3% making it the only other negative sector tracked by Standard and Poors. The third worst performing sector is Energy that has thus far eked out a 0.2% gain.


International markets continue to perform well. The European-heavy STOXX 600 index leads the major indexes I track with a year-to-date gain of nearly 16%. Since the start of the 2nd quarter on April 1st, the STOXX 600 is down -0.2%, however. This drop in the STOXX corresponds with a 6.7% increase in the Euro. This rise in the Euro makes European exports more expensive and is considered a potential drag on earnings by some investors.

Source: The Wall Street Journal (Past performance is not indicative of future returns). As of market close May 15, 2015.

The Emerging Market region has also performed well in 2015 primarily on the strength of China’s market performance (+33.2%). China has the largest single country exposure in the Dow Jones Emerging Market region index with a weighting of 16.5%. South Korea (14%) and Brazil (12%) are the second and third largest holdings and these countries are up 10.0% and 14.5% respectively year-to-date helping propel this index forward. China’s market in particular has struggled recently (-3.0% since the start of May) and this is reflected in the Emerging Region index’s flat month-to-date performance.

Oil continues to perform well in 2015. WTI Oil closed Friday at $59.69 and is now up 12% for the year and a whopping 26% since April 1st. The number of oil rigs operating in the US continues to fall with just 660 active rigs last week compared to 1069 in October 2014. This sharp reduction in rigs gives some insight on why investors have bid the price of oil back up from its low of $47.06 on March 17th. Another factor influencing the price of oil is the strength of the US Dollar. A stronger US Dollar tends to help push the price oil and other commodities down because nearly all global commodity transactions are priced in US Dollars. As the US Dollar rises compared to other currencies, it raises the price to all international buyers. Anytime the price of a good goes up, the demand for that good falls all other things being equal. This appears to be the case with oil. The US Dollar reached its recent peak to all other currencies on March 13th and oil the price of oil bottomed on March 17th. As the US Dollar has weakened since March, the price of oil has risen sharply.

Interest rates play a major role in the value of the US Dollar. A major component for the demand of US Dollars by international investors comes from their desire to own higher-paying US Treasury bonds. If the spread (the difference between two similar bonds issued by two different countries) widens, investors will typically sell the lower-yielding bonds and purchase the higher-yielding bonds. A common trade recently has been owners of German 10-year Bunds (German treasuries) selling those bonds which have yielded as little as 0.08% on April 17th and purchasing US 10-year Treasury bonds which were yielding 1.85% on that day. It takes US Dollars to buy US Treasuries, so the demand for US Dollars increases. Today, the US 10-year bond is yielding 2.15% and the German 10-year Bund is yielding 0.62%. Spreads have narrowed and the demand for US Dollars has fallen.

A QUICK REVIEW OF THE BIG FOUR ISSUES FOR 2015

At the start of the year, I said there were four issues overhanging the markets and would likely affect markets both good and bad, and that markets would remain volatile and fail to get traction until some of these issues were resolved. I will review the status of each as I see them today.

1) When and by how much the Federal Reserve raises interest rates? This has been the number one focus of investors so far in 2015 and remains an unanswered question. Consensus built earlier in the spring for a June rate increase of 0.25%. Falling interest rates in Europe as the European Central Bank started its version of quantitative easing coupled with uncomfortably weak economic data at home has more and more investors believing any interest rate increase will not come before September or even early 2016. While I personally believe it is time to start raising rates and get ahead of inflation, I believe rates will more likely increase in September than June. I also believe that raising rates 0.25% should not have a negative long-term impact on stock valuations; I am not prepared to suggest that there will not be a short-term negative impact to markets.

2) Will Greece stay in the European Union (EU)? Greece managed to pay for its most recent bond obligation to the International Monetary Fund (IMF) last week by borrowing from the IMF. You read that correctly, Greece borrowed money from the IMF just to give it right back. The account Greece borrowed came from funds previously reserved for Greece so the IMF agreed to allow this transaction. Unfortunately, that account is nearly empty and Greece faces three separate repayments in June including €1.6 billion ($1.8 billion) to bond holders on June 12th. It will be hard to see how the Greeks can work around these payments because I have read they do not have the funds to meet their obligations. As negotiations between the Greeks and European officials have progressed this year, I believe the Europeans are not going to accommodate the Greeks. This raises the likelihood of Greece leaving the EU and returning to the Drachma, but many believe this will not be a crisis for the markets as was feared several years ago. So while this remains an important issue, it may be less of a problem than previously perceived.

3) Will geopolitical problems affect markets? At the start of the year the global situation looked grave, particularly in the Middle East with the spread of ISIS. Since then there has been little improvement, but impacts on financial markets has been negligible. I believe this status quo will remain in place for now and not have a major impact on markets.

4) Will the newly elected Congress achieve progress towards passing pro-growth fiscal policies or will Washington continue partisan fighting? I said back in January that I was not optimistic about any improvement in the domestic political situation, and unfortunately, this view has proven to be true. I continue to believe that Washington will not make any move towards implementing pro-growth fiscal policies unless there is a change in the White House in 2016. I do not expect any market improvements attributable to improving fiscal policies.




LOOKING AHEAD

There has been a lot of discussion in the financial media regarding the current valuation of US markets. Some analysts are suggesting that we are in a Fed-induced bubble and that asset prices are wildly overvalued. Part of their reasoning is that the lack of a major correction since that Great Recession (we have had several 10% corrections since 2011) means we are due for a big one at some point. While I do not believe we are free of periodic corrections, I also do not believe we are due for another major correction. The numbers simply do not justify that conclusion.

The May 8th FactSet discussion of corporate earnings puts the 12-month forward price/earnings ratio (a widely used measure of value in stocks) of the S&P 500 at 16.8. The five-year average has been 13.8 and the ten-year average is 14.1. Clearly stocks are more highly valued, but not to the extreme. Additionally, the DorseyWright & Associates Overbought/Oversold status reading of the S&P 500 is +29% (>+100% indicates significant overvalue) meaning stocks are fairly valued base on the most recent ten-weeks of trading activity. What these numbers mean is that buying into this market is still okay, but outsized returns like we had in 2013 are most likely behind us. Markets can still grow from here, however, it is going to be harder to make money than it was in the early stages of this current bull market.

US stocks and International stocks are still ranked one and two of the six major asset categories I track. Equal weight indexes are favored over capitalization-weighted indexes. Small and Mid Capitalization stocks are favored as is Growth over Value. Within sectors, Health Care, Industrials, and Consumer Discretionary are favored.

Over the next several weeks some of the key economic reports due out will be the release of the Federal Reserve’s Open Market Committee minutes (May 20th) from their last meeting on April 29th. The second revision of first quarter’s GDP report will be issued on May 29th (some are expecting the revision to be downward to a negative growth number), and Jobless Claims released every Thursday morning continue to excite investors.

As I have said before, whenI look out onto the horizon, I continue to see more of the same. Some growth, a lot of headwinds due to poor fiscal policies, and a belief that Americans always adapt and overcome. The markets have not made much in the way of gains this year, but sometimes a pause is not a bad thing. I will continue to monitor events and markets and will keep you appraised of my observations.

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




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

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict.

All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poors and is a capitalization-weighted index meaning the larger companies have a larger weighting of the index. The S&P 500 Equal Weighted Index is determined by giving each company in the index an equal weighting to each of the 500 companies that comprise the index. The Dow Jones Industrial Average is based on the average performance of 30 large U.S. companies monitored by Dow Jones & Company. The Russell 2000 Index Is comprised of the 2000 smallest companies of the Russell 3000 Index, which is comprised of the 3000 biggest companies in the US. The NASDAQ Composite Index (NASDAQ) is an index representing the securities traded on the NASDAQ stock market and is comprised of over 3000 issues. It has a heavy bias towards technology and growth stocks. The STOXX® Europe 600 is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 represents large, mid, and small capitalization countries of the European region. The Dow Jones Global ex-US index represents 77 countries and covers more than 98% of the world's market capitalization. A full complement of sub indices, measuring both sectors and stock-size segments, are calculated for each country and region.

Information in this update has been obtained from and is based upon sources that NTrust Wealth Management (NTWM) believes to be reliable; however, NTWM does not guarantee its accuracy. All opinions and estimates constitute NTWM's judgment as of the date the update was created and are subject to change without notice. This update is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities must take into account existing public information on such security or any registered prospectus.
Emerging market investments involve higher risks than investments from developed countries and involve increased risks due to differences in accounting methods, foreign taxation, political instability, and currency fluctuation. The main risks of international investing are currency fluctuations, differences in accounting methods, foreign taxation, economic, political, or financial instability, and lack of timely or reliable information or unfavorable political or legal developments.

The commodities industries can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. Past performance is no guarantee of future results. These investments may not be suitable for all investors, and there is no guarantee that any investment will be able to sell for a profit in the future. The Dow Jones UBS Commodities Index is composed of futures contracts on physical commodities. This index aims to provide a broadly diversified representation of commodity markets as an asset class. The index represents 19 commodities, which are weighted to account for economic significance and market liquidity. This index cannot be traded directly. The CBOE Volatility Index - more commonly referred to as "VIX" - is an up-to-the-minute market estimate of expected volatility that is calculated by using real-time S&P 500® Index (SPX) option bid/ask quotes. VIX uses nearby and second nearby options with at least 8 days left to expiration and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index.
TIPS are U.S. government securities designed to protect investors and the future value of their fixed-income investments from the adverse effects of inflation. Using the Consumer Price Index (CPI) as a guide, the value of the bond's principal is adjusted upward to keep pace with inflation. Increase in real interest rates can cause the price of inflation-protected debt securities to decrease. Interest payments on inflation-protected debt securities can be unpredictable.
The NYCE US Dollar Index is a measure that calculates the value of the US dollar through a basket of six currencies, the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona, and the Swiss franc. The Euro is the predominant currency making up about 57% of the basket.

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

Corporate bonds contain elements of both interest rate risk and credit risk. Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and if held to maturity, offer a fixed rate of return and fixed principal value. U.S. Treasury bills do not eliminate market risk. The purchase of bonds is subject to availability and market conditions. There is an inverse relationship between the price of bonds and the yield: when price goes up, yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income.

The bullish percent indicator (BPI) is a market breath indicator. The indicator is calculated by taking the total number of issues in an index or industry that are generating point and figure buy signals and dividing it by the total number of stocks in that group. The basic rule for using the bullish percent index is that when the BPI is above 70%, the market is overbought, and conversely when the indicator is below 30%, the market is oversold. The most popular BPI is the NYSE Bullish Percent Index, which is the tool of choice for famed point and figure analyst, Thomas Dorsey.

MARKET UPDATE AND COMMENTARY
April 20, 2015


Following more volatility last week, markets had a sharp sell-off on Friday prompting the doom-and-gloomers to come out in force Friday evening and over the weekend. While last week was a down week for most major US stock indexes, year-to-date the markets remain positive.

Source: The Wall Street Journal (Past performance is not indicative of future returns)

The Dow Jones Industrial Average (DJIA) and the S&P 500 are essentially flat seventy-three trading days into 2015 while the small-cap heavy Russell 2000 and tech-heavy NASDAQ are showing gains around 4%. This is a quite a turnaround from last year when at this same time the S&P 500 was outperforming the NASDAQ by 3.4% and the Russell 2000 by 5.1%. The DJIA, however, was up a similar amount (0.03%).

The best performing major economic sector remains Health Care (+9%) followed by Consumer Discretionary (+4%) and Energy (+4%). The lagging sectors are Utilities (-6%), Financials (-1%), and Industrials (+1%). This same time last year, Real Estate (+11%), Utilities (+11%), and Energy (+6%) were the top performers with Consumer Discretionary (-4%), Information Technology (0%), and Financials (0%) lagging. Sectors routinely come in and out of favor in the course of a year or two so this is not out of the ordinary. Energy’s strength of performance has been concentrated in just the past month (+9%) but remains negative over the trailing year (-11%) and now lags the S&P 500 on a 1-, 3-, and 5-Year basis.

International markets, especially Europe, have been rebounding smartly this year. Friday’s poor performance overseas (STOXX 600: -1.6%) was attributed primarily to renewed concerns over Greece. Let me reiterate my opinions about Greece and the European Union (EU). Greece is broke and has no hope of paying its debts or current expenses and the Europeans know this. However, maintaining the integrity of the EU is of paramount importance to most of European politicians and negotiations will continue despite the acrimony between Greece and its creditors. The EU and Germans in particular have, in my view, a limit to their patience with Greece, but I believe minimal concessions by the Greeks will appease the EU for a while. In the meantime the Greeks have extended an olive branch to Vladimir Putin and may receive up to €5 billion ($5.4 billion) in “pre-payments” from Russia for future pipeline revenue (I do not have enough space to discuss the pipeline deal) which may alleviate Greece’s more immediate need for cash. However, the Greek problem can return on short notice and with a vengeance so I continue to stress the importance of keeping attention on what is happening in Greece. The eventual outcome remains to be seen and is unpredictable at this time, in my view.

Source: The Wall Street Journal (Past performance is not indicative of future returns)

Oil has rebounded strongly in April with WTI Oil up 17.7% per barrel to close Friday at $55.74. There are differing accounts of why oil has rebounded including expectation of increased demand from China, lower future production and exploration in the US, and a slightly stronger Euro. Ultimately, all of these and more factors could apply, however, oil prices trade on supply and demand fundamentals, and for now, supply and demand has found a price range between $45 and $60 to trade within.

I noted that the Euro has rebounded slightly in the past few weeks. The Euro closed Friday at $1.08, an increase of just under 3 cents from its low on April 15th at $1.058. The Euro relationship with the US Dollar is influenced by investor perception of economic growth, expected inflation, and monetary policy here and in Europe. I believe the overarching issue right now is monetary policy, and with the slew of slightly negative US economic reports from March, investors are betting that the Federal Reserve will hold off raising rates in June to later in the fall which helped push the Euro higher last week. I will have more to say about Fed policy in future Updates. My view is the European Central Bank’s (ECB) decision to engage in quantitative easing (QE) has made it more difficult for the Fed to raise rates for now.

Interest rates have continued to trend lower with the benchmark 10-year US Treasury yield closing Friday at 1.85% down from 1.94% at the end of March and from 2.17% at the start of the year. Lower yields has lifted the Barclays US Aggregate Bond index 2.2% in 2015. Longer maturity bonds continue to perform well (with greater risk) with the drop in interest rates along with the High Yield and Floating Rate bond sectors. The World Bond sector is the weakest performing bond sector in 2015 followed by Short Duration.


VOLATILITY

Volatility is a pain. No one likes it; in fact volatility leads investors to make poor investment decisions. By bad investment decisions, I mean selling low and buying high. Unfortunately, volatility is part of the investing landscape and coping skills are important.

It is important to understand investor behavior in order to be a better investor. There are complete books written on this subject, but for brevity, I will attempt to distill some of the most essential principles down to a couple of paragraphs.

I believe there are two primary reasons that are at the core of poor investor behavior. First investors lack confidence in their investments, and second they have not aligned their risk tolerance with their portfolio.

Lack of confidence in a particular investment stems from not understanding its value, understanding the inherent volatility of the investment in context to the broad market or its sector, or knowing when to sell. Each of these issues can be dealt with by both fundamental research and point and figure charting. I am particularly fond of point and figure charting for analyzing whether an investment is overbought or oversold (how is the price relative to the past ten weeks of trading history), what the current demand is for the investment relative to the broad market, sector, or other investment options, and whether the investment is on a long-term positive or negative trend. All of this data put together can help investors decide if an investment should be bought or sold. I will be happy to sit down with any of you to discuss how this process works with a specific investment in your portfolio or something you are considering purchasing. This information ultimately helps take out some of the uncertainty of decision making because it is more rules-based process.

Matching risk tolerance to your actual investment portfolio is critical and often misunderstood. For most investors their typical experience in deciding risk tolerance is to complete a questionnaire. While I believe questionnaires have a valid purpose (and required for compliance purposes), it is sometimes hard to match words or scores to feelings when you are experiencing a correction in the markets. Let me give you an example of a typical question on most questionnaires, “If your portfolio fell by 20%, would you….a, b, or c?” Whatever options a, b, or c are, my experience is that most of us just want to make as much money as possible when the markets are going up and minimize losses when the markets are going down. A 5% correction feels terrible to most of us, let alone a 20% correction. However, if a 15% or 20% correction is clearly more than you are emotionally able to handle or cannot afford to lose 20% of your overall portfolio value because of impending spending needs, then you must take smart steps to build a portfolio that avoids jeopardizing your portfolio’s value by reducing volatility. Accepting this strategy, do not, however, beat yourself up if you do not exceed the return of the S&P 500 if half of your portfolio is invested in bonds. Be realistic in your expectations. This is key.

Good investors take a longer perspective with the market than just a day or week or two. Market fluctuations can and do occur. Be prepared to accept some volatility, however, understand your investments, your portfolio’s risk characteristics, and remain focused on your objectives--not short-term volatility found in all markets.

LOOKING AHEAD

The economy slowed down in the first quarter. Corporate profits will likely be lower on lower sales. There are lots of reasons for this including the west coast dock strike, sharply lower energy earnings, and the bitterly cold winter. However, I believe this is temporary and corporations will continue to deliver solid earnings within our slowly growing economy.

We are in the middle of the first quarter reporting period for corporate earnings. According to FactSet, of the 56 S&P 500 companies that reported earnings through April 17th, 77% reported earnings above the mean estimate and 46% have reported sales over the mean estimate. The lower sales growth is, in my view, a direct reflection of the big three factors I described in the previous paragraph. However, 77% of companies continue to meet or exceed earnings estimates, and that is a big positive.

There are a handful of key economic reports due out over the next couple of weeks. The Thursday unemployment claims number is always watched closely. This volatile number, however, should be viewed in the context of moving averages and not week-to-week changes. Existing and New Home Sales reports for March will be released Wednesday and Thursday respectively. I don’t anticipate much market changing news from these reports. The March Durable Goods orders report being released this Friday is expected to show an increase of 0.5% after a poor February (-1.4%). Finally, the first quarter 2015 Gross Domestic Product (GDP) report will be issued on Wednesday, April 29th. This is always an important report with market implications. It is a little early for consensus numbers to be published, however, based upon what I have been reading, I would expect this to be a weak number under 2%. If the GDP falls below 1% that would not surprise me, but it could be problematic short-term with the markets.

My critical Dorsey Wright & Associates data continues to favor stocks. In fact, the International Stock major asset category just slipped ahead of Bonds for the first time since mid-December 2014, to take over the number two position out of the six I follow within the Daily Asset Level Indicator matrix.









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




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

All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poors and is a capitalization-weighted index meaning the larger companies have a larger weighting of the index. The S&P 500 Equal Weighted Index is determined by giving each company in the index an equal weighting to each of the 500 companies that comprise the index. The Dow Jones Industrial Average is based on the average performance of 30 large U.S. companies monitored by Dow Jones & Company. The Russell 2000 Index Is comprised of the 2000 smallest companies of the Russell 3000 Index, which is comprised of the 3000 biggest companies in the US. The NASDAQ Composite Index (NASDAQ) is an index representing the securities traded on the NASDAQ stock market and is comprised of over 3000 issues. It has a heavy bias towards technology and growth stocks. The STOXX® Europe 600 is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 represents large, mid, and small capitalization countries of the European region. The Dow Jones Global ex-US index represents 77 countries and covers more than 98% of the world's market capitalization. A full complement of sub indices, measuring both sectors and stock-size segments, are calculated for each country and region.

Information in this update has been obtained from and is based upon sources that NTrust Wealth Management (NTWM) believes to be reliable; however, NTWM does not guarantee its accuracy. All opinions and estimates constitute NTWM's judgment as of the date the update was created and are subject to change without notice. This update is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities must take into account existing public information on such security or any registered prospectus.
Emerging market investments involve higher risks than investments from developed countries and involve increased risks due to differences in accounting methods, foreign taxation, political instability, and currency fluctuation. The main risks of international investing are currency fluctuations, differences in accounting methods, foreign taxation, economic, political, or financial instability, and lack of timely or reliable information or unfavorable political or legal developments.

The commodities industries can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. Past performance is no guarantee of future results. These investments may not be suitable for all investors, and there is no guarantee that any investment will be able to sell for a profit in the future. The Dow Jones UBS Commodities Index is composed of futures contracts on physical commodities. This index aims to provide a broadly diversified representation of commodity markets as an asset class. The index represents 19 commodities, which are weighted to account for economic significance and market liquidity. This index cannot be traded directly. The CBOE Volatility Index - more commonly referred to as "VIX" - is an up-to-the-minute market estimate of expected volatility that is calculated by using real-time S&P 500® Index (SPX) option bid/ask quotes. VIX uses nearby and second nearby options with at least 8 days left to expiration and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index.
TIPS are U.S. government securities designed to protect investors and the future value of their fixed-income investments from the adverse effects of inflation. Using the Consumer Price Index (CPI) as a guide, the value of the bond's principal is adjusted upward to keep pace with inflation. Increase in real interest rates can cause the price of inflation-protected debt securities to decrease. Interest payments on inflation-protected debt securities can be unpredictable.
The NYCE US Dollar Index is a measure that calculates the value of the US dollar through a basket of six currencies, the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona, and the Swiss franc. The Euro is the predominant currency making up about 57% of the basket.

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

Corporate bonds contain elements of both interest rate risk and credit risk. Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and if held to maturity, offer a fixed rate of return and fixed principal value. U.S. Treasury bills do not eliminate market risk. The purchase of bonds is subject to availability and market conditions. There is an inverse relationship between the price of bonds and the yield: when price goes up, yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income.

The bullish percent indicator (BPI) is a market breath indicator. The indicator is calculated by taking the total number of issues in an index or industry that are generating point and figure buy signals and dividing it by the total number of stocks in that group. The basic rule for using the bullish percent index is that when the BPI is above 70%, the market is overbought, and conversely when the indicator is below 30%, the market is oversold. The most popular BPI is the NYSE Bullish Percent Index, which is the tool of choice for famed point and figure analyst, Thomas Dorsey.

MARKET UPDATE AND COMMENTARY
April 5, 2015


As pessimism appears to have a strangle hold on market sentiment following a series of disappointing economic reports—especially the March Employment Situation report released last Friday, I ask, why would we expect anything different from the economy other than what we have seen over the past couple of years?

The answer to my question is we should not. We should not because nothing has really changed and there is little expectation that anything will in the next few years. The US economy has been stuck in a rut of 2-2.5% annualized real growth since the start of the recovery in 2009. There has been no change to fiscal policies since the Obama administration took office six years ago. The Republicans have been unable to force any of what they consider pro-growth policy changes because they lack the ability to override presidential vetoes. The passage of the Keystone Pipeline bill and subsequent veto is an example of this. The financial regulatory burden on US business has grown unchecked. The Federal Reserve has entered and exited three different cycles of quantitative easing (QE) and has kept the Fed Funds rate at near zero since mid-December 2008. While the unemployment rate has fallen to 5.5%, the actual number of people working has fallen to levels last seen in the 1970’s.

Yet, despite the ongoing mess in Washington, the S&P 500 is up 16.13% per year going back six years (April 4, 2009). This seems hardly consistent with all of the negativity surrounding the economy, but this is precisely what has happened. The explanation to this seeming inconsistency is really at the heart of what has been happening in the US over the past six years, and I would argue is what matters today looking forward.

First, consider that the S&P 500 was rising off an incredible low in 2009. The Great Recession of 2008-2009 wiped away nearly 13 years of growth in the markets. Let me say that again—13 years of growth! Stock valuations were crushed and the bar was set very low for company performance going forward. Second, companies reacted to the Great Recession by rebuilding balance sheets and squeezing out every penny of unnecessary expenses from daily operations. This in turn helped corporate profitability, and corporate profitability is, in my view, the key to rising stock valuations. Third, technology and entrepreneurship has led to a new wave of product and industrial revolution. Everything from Apple’s continued capability enhancement of their successful iPhone franchise to a multi-generational technological change in oil and natural gas production has forever altered the economic landscape in the United States. These factors and more have helped restore stock valuations to current levels even as many naysayers were predicting another great collapse in markets.

I continue to remain optimistic that the entrepreneurial drive and spirit of Americans will continue to grind the economy forward despite the many headwinds. What I also believe is that this road forward will come with inevitable pitfalls and stumbles. The past six years are a perfect example of this. I noted that the S&P 500 index has averaged a 16% gain over the past six years, however, only two of those years actually exceeded the 16% average return (2009 and 2013 with gains of 23.4% and 29.6% respectively), and included one year with no gain at all (2011). Finally, I do not expect economic growth to look much different than it has since the recovery began because the economic and fiscal policy environment today is not conducive to much more than sluggish growth. Do I think we will continue an annual pace of 16% growth in stock markets? I do not, however, I do believe that the current trend of positive long-term gains in the markets will continue for now.


1st QUARTER REVIEW

The first quarter of 2015 is in the books. Below is a summary of some of the key US indexes I follow:








The DJIA and S&P 500 returns are not much different from the same period in 2014. The biggest difference has been the strong performance of smaller capitalization stocks (Russell 2000), and the solid strength of many technology stocks (NASDAQ). The best explanation I have observed for these two indexes doing markedly better than the previous year period is that smaller capitalization stocks have less exposure to export-driven earnings and thus less affected by the stronger US Dollar, and certain technology areas continue to display strong growth prospects.

For the quarter, seven of the eleven major economic sectors outperformed the S&P 500 index. The Health Care (+9%), Consumer Discretionary (+5%), and Real Estate (+5%) sectors were the best performing. The Utility sector significantly underperformed all other sectors losing just over 5% followed by Energy (-1%), Financials (0%), and Industrials (1%).


International stocks, especially European stocks, had a good first quarter:









The strength of European markets (STOXX 600) stands out among key international indexes. While European economies have struggled over the past few years, I believe the announcement of a quantitative easing policy by the European Central Bank (ECB) and a falling Euro has helped boost investor confidence in European stock markets.

The weakness of the Euro has been one of the key stories in the first quarter of the year. The Euro fell 11.3% compared to the US Dollar through March of this year and is now down just over 22% since early May 2014. This weakness has influenced everything from exports, tourism, and energy prices. The Euro rallied just over 4% in the last two weeks of March on US economic weakness and falling US Treasury yields. While a number of economists still anticipate parity between the Euro and the US Dollar by the end of the year, I believe the accuracy of this prediction will be dependent on what action the Federal Reserve takes later this year on interest rate increases. The wider the gap between US and European interest rates with US rates higher, I believe the stronger the US Dollar will become.

The trend of interest rates in March and for the first quarter of the year continues to be lower. The benchmark 10-year US Treasury yield ended March at 1.942% compared to 2.172% at the start of the year. The Barclays US Aggregate Bond index, a broad measure of bond performance, was up 1.7% for the quarter. I believe falling rates reflect the negative economic reports that have trended during the first quarter and are not a positive development. It is hard to imagine rates continuing to remain at such depressed levels, and I believe that with better economic performance later in the year coupled with the prospect of the Federal Reserve possibly raising rates this summer or fall, interest rates may move higher by the end of the year.

The Commodities category continues to be the weakest performing major asset category I follow. The Dow Jones UBS Commodity index finished the quarter down 6% following a loss of 17% in 2014. Energy was the primary contributor to this poor performance. WTI Oil lost 11.1% in the quarter after losing nearly 46% in 2014. Natural Gas fell 11.6% in the quarter after falling 29% in 2014. The impact on lower oil prices is rippling through the economy hurting oil-related stocks in particular. Lower oil prices have not translated into higher retail sales in other sectors as many were expecting, however, I do believe there will be some improvement for the consumer assuming oil prices continue at these low levels. One more point about oil prices. Over the past 40-years, the kind of political turmoil currently on display in the Middle East would have sent oil prices soaring. The resurrection of energy production in the US coupled with Saudi Arabia’s unwillingness to cut production for the benefit of the likes of Iran, Iraq, and Russia, has removed most of what I believe to be the terrorist premium in oil prices for now.




LOOKING AHEAD

I believe that markets will continue to limp along for now. As I noted at the beginning of my report, there is a fair amount of pessimism within investors. I fully expect the first quarter earnings reporting season which kicks off this week will be unspectacular reducing the expectation of stronger markets for the near-term.

I also believe the kind of volatility we have experienced so far this year will continue. Again, the issues investors faced in the first quarter remain and this uncertainty can drive larger daily moves in the major indices. I have been watching the negotiations between Greece and the European Union (EU) and remain very concerned about the trend there. While I have said that both parties have much to lose if Greece pulls out or is expelled from the EU, their disagreements appear to be growing. Greece may simply run out of money to meet its obligations in the next 30 to 45-days. This will trigger any number of unpleasant options for both parties and possibly lead to Greece’s departure from the EU. I do not know how all of this will work out, but this issue has not gone away.

There are only a handful of key economic reports due out over the next couple of weeks. The Federal Reserve Open Market Committee (FMOC) minutes will be released this Wednesday and will provide economists with greater insight on the Fed’s most recent thinking about interest rate hikes. The question about when they will raise rates remains of great interest to most investors. However, I expect that earnings reports will be the dominant theme for the next few weeks as companies and analysts all talk about the impact of the stronger US Dollar and oil prices on earnings. Earnings are important and drive stock valuations so I will be following the news closely.

Finally, I will remind everyone that the data remains very supportive for equities. The primary data I follow provides long-term guidance and does not react to the day-to-day or even week-to-week ups and downs. The Money Market category remains ranked at 122 out of 133 sectors I follow. This means that nearly 92% of the stock, bond, commodity, and currency categories I track are doing better on a relative strength basis than your money market account. Stocks remain the dominant major asset category with Small and Mid-Capitalization stocks favored and Growth-oriented stocks are preferred over value stocks. The other Dorsey Wright & Associate indicators I follow also suggest more of the same ahead.

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




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

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Past performance is not indicative of future results and there is no assurance that any forecasts mentioned in this report will be obtained. Technical analysis is just one form of analysis. You may also want to consider quantitative and fundamental analysis before making any investment decisions.

All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poors and is a capitalization-weighted index meaning the larger companies have a larger weighting of the index. The S&P 500 Equal Weighted Index is determined by giving each company in the index an equal weighting to each of the 500 companies that comprise the index. The Dow Jones Industrial Average is based on the average performance of 30 large U.S. companies monitored by Dow Jones & Company. The Russell 2000 Index Is comprised of the 2000 smallest companies of the Russell 3000 Index, which is comprised of the 3000 biggest companies in the US. The NASDAQ Composite Index (NASDAQ) is an index representing the securities traded on the NASDAQ stock market and is comprised of over 3000 issues. It has a heavy bias towards technology and growth stocks. The STOXX® Europe 600 is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 represents large, mid, and small capitalization countries of the European region. The Dow Jones Global ex-US index represents 77 countries and covers more than 98% of the world's market capitalization. A full complement of sub indices, measuring both sectors and stock-size segments, are calculated for each country and region.

Information in this update has been obtained from and is based upon sources that NTrust Wealth Management (NTWM) believes to be reliable; however, NTWM does not guarantee its accuracy. All opinions and estimates constitute NTWM's judgment as of the date the update was created and are subject to change without notice. This update is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities must take into account existing public information on such security or any registered prospectus.
Emerging market investments involve higher risks than investments from developed countries and involve increased risks due to differences in accounting methods, foreign taxation, political instability, and currency fluctuation. The main risks of international investing are currency fluctuations, differences in accounting methods, foreign taxation, economic, political, or financial instability, and lack of timely or reliable information or unfavorable political or legal developments.

The commodities industries can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. Past performance is no guarantee of future results. These investments may not be suitable for all investors, and there is no guarantee that any investment will be able to sell for a profit in the future. The Dow Jones UBS Commodities Index is composed of futures contracts on physical commodities. This index aims to provide a broadly diversified representation of commodity markets as an asset class. The index represents 19 commodities, which are weighted to account for economic significance and market liquidity. This index cannot be traded directly. The CBOE Volatility Index - more commonly referred to as "VIX" - is an up-to-the-minute market estimate of expected volatility that is calculated by using real-time S&P 500® Index (SPX) option bid/ask quotes. VIX uses nearby and second nearby options with at least 8 days left to expiration and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index.
TIPS are U.S. government securities designed to protect investors and the future value of their fixed-income investments from the adverse effects of inflation. Using the Consumer Price Index (CPI) as a guide, the value of the bond's principal is adjusted upward to keep pace with inflation. Increase in real interest rates can cause the price of inflation-protected debt securities to decrease. Interest payments on inflation-protected debt securities can be unpredictable.
The NYCE US Dollar Index is a measure that calculates the value of the US dollar through a basket of six currencies, the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona, and the Swiss franc. The Euro is the predominant currency making up about 57% of the basket.

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

Corporate bonds contain elements of both interest rate risk and credit risk. Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and if held to maturity, offer a fixed rate of return and fixed principal value. U.S. Treasury bills do not eliminate market risk. The purchase of bonds is subject to availability and market conditions. There is an inverse relationship between the price of bonds and the yield: when price goes up, yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income.

The bullish percent indicator (BPI) is a market breath indicator. The indicator is calculated by taking the total number of issues in an index or industry that are generating point and figure buy signals and dividing it by the total number of stocks in that group. The basic rule for using the bullish percent index is that when the BPI is above 70%, the market is overbought, and conversely when the indicator is below 30%, the market is oversold. The most popular BPI is the NYSE Bullish Percent Index, which is the tool of choice for famed point and figure analyst, Thomas Dorsey.