It has been three weeks since my last Update and Commentary and a lot has changed and nothing has changed. We have survived the latest dysfunction in Washington known as the sequester, Fitch Ratings downgraded Italy's credit rating following inconclusive elections, data from the European zone continues to indicate that economic growth is proving elusive, and Japan continues to weaken the Yen in an effort to stimulate its domestic economy. In response, the Dow Jones Industrial Average (DJIA) has continued climbing and is now at an all-time high, and the S&P 500 sits just 25 points (1.6%) short of its all-time high (1576.09, October 11, 2007). The question now being repeated over and over again in the media is can

this market continue to go up or will the myriad of issues facing investors wreck the market and dash investors' hopes as happened in 2007?

The DJIA closed last week at 14,397 up 307 points (+2.2%) from the previous week's close and is now up
2.4% in March and 9.9% for the year. Last week's movement was helped by the February Employment
Situation report released Friday showing a nice increase of 246,000 private sector jobs and the unemployment Rate falling to 7.7%. The S&P 500 also gained 2.2% last week and is tracking closely with the DJIA. For the month of March, the S&P 500 is up 2.4% and is up 8.8% for the year. The tech-heavy NASDAQ has actually lagged slightly and is up 7.4% for the year. The mid and small-capitalization
heavy index, the Russell 2000, gained 3.0% last week, is up 3.4% in March,
and is up 11.0% in 2013.

All eleven major economic sectors are positive so far in 2013 with Health Care leading all sectors with a nearly 12% gain followed by Industrials, Financials, Consumer Staples, and Consumer Discretionary (each exceeding the DJIA). Telecom, Information Technology, and Materials are the three weakest performers yet have posted gains of 4.5% or greater.

International stocks continued to rise in the face of troublesome economic data and political turmoil in Europe. Growth has come to a stall in the European Union (EU) as reported by Eurostat. The European Commission's statistical arm is predicting that real GDP growth among the 27 EU members will be just 0.1% for 2013 after a -0.3% rate for 2012. Italy, the EU's third largest economy, has been unable to form a government after the late-February election failed to produce a majority for any party. European stocks pulled back when it became apparent that Italian voters would not elect a pro-austerity group, or any group, leaving politicians unable to reach a consensus and putting austerity initiatives in doubt. Since the elections,
makets have calmed somewhat with the European STOXX 600 posting a 2.3% gain last week (up 5.7% for the year). I believe that investors in Europe remain confident due to the European Central Bank's expressed
willingness to provide any liquidity required to governments should they be unable to borrow enough to meet fiscal deficits. More broadly, the MSCI EAFE index gained 1.7% last week, is up 0.9% for the month, and up 4.9% for the year.

Global currency markets have pushed the US Dollar higher against most key currencies. The US Dollar index has reached a seven-month high has the Euro has fallen 1.3% against the US Dollar and the Japanese Yen has plunged 7.9%. The drop of the Yen is attributable to the newly elected Japanese Prime Minister pushing monetary policy into a more accommodative phase in an effort to spur domestic growth. Not without critics, notably the Chinese, this currency action has helped push the Japanese Nikkei stock index up 18.2% for the year. I believe the fall of the Euro reflects the lingering nervousness surrounding Italy's political turmoil and govement by European investors out of the stagnate economic climate in Europe and into a more robust US economy. Currency investors are also cognizant of the rising interest rates here in the US in reaction to stronger economic data such as the February Employment Situation report.

The total return on bonds remains flat thus far in 2013 as rising interest rates have cut into valuations. The Barclays US Aggregate Bond index is down 0.8% for the year hurt by longer duration US Treasuries and
Corporates. The interest rate on the US 10-year Treasury jumped 0.2% last week pushing the interest rate to 2.056%. This weekly increase was the largest one-week jump on a percentage basis since mid-September of last year. The bond sectors that typically perform well in an equity-driven market such as Preferreds and High Yield are the performance leaders in an indifferent bond market.

Commodities continue to struggle as evidenced by the broad-based UBS Dow Jones Commodity index down 1.3% this year. Gold is down 5.8% year-to-date as investors grow concerned about how much longer the Federal Reserve will continue its accommodative monetary policies and as other asset categories, like equities, become more attractive. Gold closed Friday at $1576.90 per ounce. WTI Oil closed Friday at $91.95 and is up 0.3% for the year. Looking at other commodities, Natural Gas has jumped 11.6% over the past three weeks as cold weather dominates the country and pushing down supplies while wheat has fallen by nearly 12% for the year.

UNDERSTANDING BOND VALUATIONS AND INTEREST RATE CHANGES

Most of us own bonds in our portfolios. In some cases, bonds take up a considerable portion of an individual portfolio either because investors require a source of steady income or because bonds are typically less volatile than stocks, or for both of these factors. I would also include overall performance relative to the other major asset categories as a reason to invest in bonds. Bonds have outperformed the S&P 500 index on average since the start of this century. This has been a great time to own bonds: good performance, low volatility, and income-a perfect brew for investors. However, just as a good wine can turn to vinegar over time, so a bond portfolio can sour right before your eyes. In order to be prepared to protect your bond portfolio, you need to understand some basics about bonds and what determines their valuation. Let's start by looking at the basics.

A bond is a contract between a borrower and a lender. This contract stipulates two basic components-how much interest the borrower will pay and when the borrowed money must be returned to the lender. There can be many covenants surrounding this contract such as the posting of collateral, down payments, or terms to adjust interest payments that can complicate the contract, but it is a relatively simple deal in the end. The
biggest concern a lender has is getting their money back so the credit worthiness of the borrower always factors into the contract. Generally, the more comfortable a lender feels about the borrower's ability to repay, the lower the interest rate the lender will charge. Bond sectors are simply the aggregation of like-type contracts.

Like other financial assets, bond contracts can be bought and sold. If a lender has no interest in selling the contract, then the primary risk the lender takes is whether the borrower can repay the money borrowed. This is known as credit risk. However, if the lender decides to sell the bond contract, the lender and buyer
typically a third party not related to the borrower) must reach agreement on what the bond contract is worth at the time of sale. In determining the value of the contract, the lender and buyer compare the bond contract to similar contracts in terms of  interest rate, the remaining life of the contract, and the credit risk of the borrower. For example, if the bond contract was originally 20 years and there is now 10 years remaining, then the contract is compared to similar 10-year bond contracts. This is where it gets interesting.

Interest rates rarely stay the same over time so it is doubtful that the contractual interest rate paid by the borrower is the same as the prevailing of other similar bond contracts. To equalize the contractual interest
rate to the prevailing interest rate, the value of the borrowed amount, or principal, is adjusted higher or lower. For example, if a bond contract is paying 5% interest but the prevailing interest rate of a similar contract is 3%, then the buyer would be willing to pay an amount greater than the principal to capture the higher interest payments by the borrower. Likewise, if the bond contract is paying 5% but the prevailing rate is 8%, the seller will have to reduce the value of the bond contract to compensate the buyer for lost interest they could have received from other 8% contracts. So if interest rates fall, the value of the bond contract will rise; and if interest rates rise as in the second example, the value of the contract will fall. This explains the inverse relationship between bond prices and interest rates, and reflects what is known as interest rate risk.

For investors, bonds have been a tremendous investment over the past thirty years during which interest rates have generally been on a downward path. The greatest risk for most bond investors over this time
has been credit risk, and this has generally not been a problem except periodically within the higher-risk bond sectors like the High Yield sector. With interest rates at historical lows, investors must be sensitive to the possible impact of rising interest rates on the valuation of their bond portfolios. While interest rate movement is one of the most difficult calls for economists and pundits to make, there is a growing consensus that interest rates will rise at some point in the future. If interest rates do move up, I believe interest rate sensitive bond sectors (like long duration US Treasuries and Corporates) may lose principal. To avoid a loss of principal, I think investors should consider seeking out bond sectors that are not as sensitive to interest rate risk such as Inflation Adjusted, Floating Rates, Preferreds, and High Yield. If you have any questions on this very important topic, please do not hesitate to reach out and ask me.

LOOKING AHEAD

The question on top of everyone's mind today is whether or not this market can continue to rise. Afterall, the last time the DJIA reached this level, a market crisis sent not just the DJIA, but nearly every asset class down by 20%, 30%, or more. While every market is different, and I believe this market is different than that of 2007, it helps to have some historical data to put things in perspective.

Dr. Steve Sjuggerud, investment newsletter author, looked back over 100 years of S&P 500 data (Buyer's Remorse, March 1, 2013, Daily Wealth) and discovered that when purchasing stocks near or at their annual 12-month highs, one year later the S&P 500 was up an average of 9.6%. When the S&P 500 was purchased at or near the annual 12-month low, one year later the S&P 500 gain was 0.0%. This compares to a buy-and-hold strategy gain of 5.6%. Dr. Sjuggerud gave no explanation of why these findings occur, but I believe it is due to market momentum. One or more factors help push markets to new highs, and these factors are not likely to vanish overnight unless there is some shock on the financial system that catches market participants off guard. A recent example of this was the Lehman Brothers bankruptcy, while 9/11 was another. Again, not all markets act the same way and the past is not a guarantee of the future, but data suggests that markets can continue higher. As I have said many times before, the path forward will always include some dips and market corrections along the way, so do not think that this will be a straight road
higher.

The New York Stock Exchange Bullish Percent (NYSEBP) closed Friday at 74.44 and is at virtually the same level as it was at the beginning of February. There have been a couple of small dips, but the NYSEBP has not seriously challenged falling below 70 during this time frame.

There has been no change in the long-term Daily Asset Level Indicator prepared by Dorsey Wright & Associates. Their analysis suggests US stocks and International stocks are the two strongest major asset categories on a relative strength basis. Bonds remains in the third position followed by Currencies, Cash, and then Commodities. Looking below below the major asset categories, middle capitalization stocks are favored, as is growth over value, and equalweighted indexes over capitalization-weighted indexes. Equal-weighted indexes are those where each stock in the index is weighted the same, while in capitalization-weighted indexes the larger stocks have the largest weighting consistent with their size relative to the other stocks. On a relative strength basis, the top three major economic sectors are unchanged: Consumer Discretionary, Financials, and Health Care. Financials and Health Care have reversed positions since the last update. Industrials is in fourth position followed by Consumer Staples and Real Estate. Energy and Utilities remain as the bottom two sectors. US  treasuries and International Bonds are favored in the Bond category, while US and Developed Markets are favored within the International stock category. Energy and Precious Metals are the favored sectors within the Commodity category.

The coming week has several important economic reports-February Retail Sales on Wednesday, Producer Price Index and Initial Jobless Claims on Thursday, and the Consumer Price Index on Friday. As has been the case for the past year or so, these economic reports have been good, bad, and indifferent with little consistency. I expect nothing new. However, the Retail Sales figures are important and consensus calls for a modest increase from January's number. The Federal Reserve and Housing will be  the focus of the following week. Investors will be parsing every word spoken by Fed Chairman Bernanke for any sign that he will take his foot off the easy monetary policy accelerator. I do not think he will change his general view of the economy or offer any indication that he is prepared to tighten monetary policy any time soon.

As always, it is imperative to be vigilant and not to let the recent market strength lull you into a false sense of expectation that the markets will continue to rise at this early year pace.

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

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. Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes
in interest rates, or factors affecting a particular industry or commodity, including international economic, political and regulatory developments.

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

The Dow Jones UBS Commodities Index is composed of futures contracts on physical commodities. This index aims to provide a broadly diversified representation of commodity markets as an asset class. The index represents 19 commodities which are weighted to account for economic significance and market liquidity. This index cannot be traded directly. The commodities industries can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. Past performance is no guarantee of future results. These investments may not be suitable for all investors, and there is no guarantee that any investment will be able to sell for a profit in
the future.

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

As always, if you have any specific questions on your portfolio or wish to talk to me, please do not hesitate to call.

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


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


Sincerely,

Paul Merritt, MBA, AIF ®, CRPC ®
Principal
NTrust Wealth Management

Past performance is not indicative of future results and there is no assurance that any forecasts

mentioned in this report will be obtained. Technical analysis is just one form of analysis. You may

also want to consider quantitative and fundamental analysis before making any investment decisions.

Information in this update has been obtained from and is based upon sources that NTrust Wealth

Management (NTWM) believes to be reliable, however NTWM does not guarantee its accuracy. All

opinions and estimates constitute NTWM's judgment as of the date the update was created and are

subject to change without notice. This update is for informational purposes only and is not intended as

an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities must

take into account existing public information on such security or any registered prospectus.

The bullish percent indicator (BPI) is a market breath indicator. The indicator is calculated by taking

the total number of issues in an index or industry that are generating point and figure buy signals and

dividing it by the total number of stocks in that group. The basic rule for using the bullish percent

index is that when the BPI is above 70%, the market is overbought, and conversely when the

indicator is below 30%, the market is oversold. The most popular BPI is the NYSE Bullish Percent

Index, which is the tool of choice for famed point and figure analyst, Thomas Dorsey.

All indices are unmanaged and are not available for direct investment by the public. Past performance

is not indicative of future results. The S&P 500 is based on the average performance of the 500

industrial stocks monitored by Standard & Poors, this is a market capitalization weighted index,

meaning the largest companies in the S&P 500 have a greater weighting than smaller companies. The

S&P 500 Equal Weighted Index is determined by giving each of the 500 stocks in the index the same

weighting in the index. The Dow Jones Industrial Average is based on the average performance of 30

large U.S. companies monitored by Dow Jones & Company. The Dow Jones Corporate Bond Index is

comprised of 96 investment grade issues that are divided into the industrial, financial, and

utility/telecom sectors. They are further divided by maturity with each of the sectors represented by

2, 5, 10 and 30-year maturities. The Morgan Stanley Capital International (MSCI) Europe, Australia

and Far East (EAFE) Index is a broad-based index composed of non U.S. stocks traded on the major

exchanges around the globe. The Russell 2000 Index is comprised of the 2000 smallest companies

within the Russell 3000 Index, which is made up of the 3000 biggest companies in the US.

Securities and Advisory Services offered through Commonwealth Financial Network®,

Member FINRA/SIPC, a Registered Investment Adviser.

This e-mail is an advertisement and you may opt out of receiving further e-mails. To opt out, please

respond to this e-mail with 'Opt Out' in the subject field.

After getting off to a strong start in January, equity markets have been flat so far this month.  No February surge to follow January’s move, but nor has a pullback occurred as many pundits have been suggesting is eminent. Economic data released over the past two weeks has offered no clues, no scintillating pieces of evidence that the economy is getting ready to break out into another great round of growth; but there is also no evidence to suggest that we are on a brink of another recession.  Economic data that has been released since the first estimate of the 4^th Quarter 2012 Gross Domestic Product (GDP) (Q4 2012 GDP: -0.1%) now suggests 4^th Quarter real GDP growth was positive in the 0.4% to 0.7% range.  Nothing to get excited about, but not a recession either.  Attention has now shifted to Washington (again) as worries about another budget crisis begin to build (again), and a looming deadline approaches (again).  More on this shortly.

The Dow Jones Industrial Average (DJIA) failed to close the week above 14,000 for the second week in a row since closing Friday, February 1^st, at 14,010.  This past Friday, the DJIA ended the week at 13,982 giving back 11 points (-0.1%) for the week.  For the month, the DJIA is up 121 points (0.9%); however, if you strip out the 149-point gain on February 1^st, the DJIA is now down 28 points (-0.2%) for the month.  Clearly a pause.

The other main US indexes I follow have also remained in positive territory in February.  The S&P 500 gained 0.1% for the week and is up 1.45% for the month.  The Russell 2000 added 1.0% for the week and is up 2.3% for the month, while the NASDAQ Composite fell -0.1% for the week but is up 1.6% for February. 

Seven trading weeks are now completed for 2013 and the DJIA is up 6.7%, the S&P 500 is up 6.6%, the Russell 2000 has gained 8.7%, and the NASDAQ is up 6.1%.  A good start to 2013.

The eleven major US economic sectors were mixed last week reflecting the general uncertainty about the overall direction of the markets.  Industrials, Financials, and Real Estate were the best performing of the eleven sectors and all easily out-performed the S&P 500.  Telecom, Energy, and Information Technology were the weakest sectors and finished in slightly negative territory for the week.  Energy, Industrials, Health Care, and Financials are the top four performing sectors and have all gained between 8% and 9.5% for the year.  Telecom, Information Technology, Materials, and Real Estate are the bottom four performers; but all have posted gains between 2% and 5.5%.  Much like last year, year-to-date spread between the best performing sector and the worst is not wide by historical averages, and every sector has positive returns.

Sounding a bit like a broken record from last year, International markets have continued to improve along with US markets, but lagged in the process.  The broad international index, the MSCI EAFE, fell 0.6% last week but is up 3.7% for the year.  The European-based STOXX 600 was unchanged over the previous week and is now up 2.7% for the year.  Europe remains under great economic pressure as growth in most countries remains very elusive.  However, much like here in the US, I believe investors’ expectations are so low that any growth or even continued survival of the European Union (EU) will be considered a victory and rewarded by investors.  The Emerging Markets were off 0.1% last week and are up 2.3% for the year, while the Developed Markets were off 0.1% last week and have gained 5.1% for the year. 

Bonds remain stuck in neutral.  The Barclays Aggregate Bond index, a broad indicator of the US bond market, was essentially unchanged last week and is now down 0.7% for the year.  US Treasury yields have continued to creep upwards at a very slow pace.  The US Treasury 10-year yield closed Friday at 2.010% compared to the previous Friday’s close of 1.949%, and is up from last year’s close of 1.758%.  The US Treasury 30-year has followed a similar pattern as the 10-year and the future direction of bond yields is generating a great deal of debate in the media about the painful end of the bond “bubble.”  This is an important topic for many investors given the size of their bond investments, but too long to address here; however, I will be focusing on this subject in the market commentary part of my Update in the very near future.  I will offer this one comment today—with the Federal Reserve committed to an accommodative monetary policy, it would be very difficult, in my opinion, to bet heavily against bonds right now.  The best performing bond sectors include Preferreds, High Yields, and International.  Extended duration bonds of all types (Treasuries, Government Agencies, and Corporates) have all underperformed.

There has been a lot of news lately about currencies going into the G-20 Summit this past weekend in Moscow.  Japan is just the most recent country to draw the ire of global finance ministers as Japan has publically embarked on a policy of currency devaluation in order to increase exports.  The Japanese Yen has fallen 7.8% compared to the US Dollar since the start of the year.  The leaders from the G-20 are expected to release a statement specifically calling for greater verbal discipline among the world’s largest economic leaders and to not use currency manipulation as a specific economic tool for growth.  Monetary policy has a major impact on currency valuations even if economic leaders like US Federal Reserve Chairman Ben Bernanke minimize its impact suggesting that a weaker US Dollar is but a side effect of this country’s efforts to grow our domestic economy.  Mr. Bernanke has very publicly stated that getting the US economy growing (with the aid of easy monetary policies) will clearly offset the negative aspects of a weaker US Dollar to our trading partners.  The US Dollar index is up a modest 1.6% in February on a weakening Japanese Yen (-1.95% to the US Dollar) and Euro (-1.62% to the US Dollar).  While I admit that currencies are not the most exciting topic I write about, currency valuations have important consequences on every aspect of US and global economic growth.  I will continue to follow topic issue closely.

Commodities continue to lag in 2013.  The Dow Jones UBS Commodity index, a broad commodity indicator, fell 1.4% last week and is now down 2.2% for the month of February.  Nearly every major commodity category fell last week led by Gold which lost $59.60 (-3.6%) an ounce to close Friday at $1607.30.  The fall in gold was attributed mostly to reports citing several large gold investors, like George Soros, who announced cuts to their gold holdings.  WTI Oil pulled back slightly for the first weekly loss of the year.  A barrel of WTI Oil closed Friday at $95.40 down $0.32 (-0.3%) from the previous Friday’s close.  For the year, the Dow Jones UBS Commodity index is up 0.1%, Gold is down 4.0%, and WTI Oil is up 4.0%. 

MUCH ADO ABOUT NOTHING

After much reading and analysis regarding sequestration and the impact on the US economy, I have come to the conclusion that it is all much ado about nothing.

As a proud veteran and patriot, I am not happy about the continuing real cuts to the Pentagon’s budget, and I believe that Congress must address defense spending very carefully; however, from a broad economic impact there is little to fear.  I also believe that the financial markets have come to the same conclusion, which is why I do not think markets will react negatively if sequestration goes into effect.

When I conducted a Google search using the term “true impact of sequestration,” I received 1.3 million hits, and quickly discovered that the search results were dominated by reports from special interest groups about how devastating sequestration-related cuts will impact them or the programs they strongly support.  I get it.  There will be pain, but in the total context of the economy, sequestration represents a little more than 1% of federal spending in 2013 according to the Congressional Budget Office.  Does this mean this makes any sense on how to run the government of the largest economy in the world?  Of course not, and politicians from both sides of the aisle should be embarrassed by such incompetent governance, but devastating to the economy—not so much.

On another note, I also believe that some investors hate success.  By that I mean the moment the markets began closing in on a 14,000 DJIA, the naysayers immediately began suggesting that markets were overpriced and set for a correction.  I would not discount the likelihood that a pullback could happen at some point, but I also understand that the technicals in the economy remain positive.  All of us are acutely aware of what happened the last time the markets passed 14,000 in the summer of 2007, and investors must not let a simple number detract from making sound investment decisions.

Please do not interpret my comments to mean that I am an endorsing a belief that markets are immune from the realities of many of the headwinds facing our country today.  I am not suggesting that at all, however, I am also aware that it is completely possible to become frozen by our fears today and that in turn could lead to inaction.  I am more confident in data than headlines, and coupled with your individual needs and risk tolerance; analysis of data helps guide my investment analysis and recommendations.

LOOKING AHEAD

Investors are nervous.  They are nervous because of the impending sequester, they are concerned about the rising price of oil, they are worried about the unemployment rate, scared that Washington is completely broken, that slow economic growth in the US is here to stay, of recession in Europe, and they are afraid that Israel and Iran may go to war.  I am sure I have forgotten something, but you get my point.  There is much to be aware of and keep in mind, but I suggest that worries and fear are always part of the investment process, so let’s focus on what we know and deal with that effectively.

The New York Stock Exchange Bullish Percent (NYSEBP) closed Friday at 74.99 rising slightly from the close last Friday of 74.53.  This marks the seventh straight weekly increase in this important indicator.  The rate of growth has slowed, but that should be expected after the NYSEBP moves above 70.  Remember that risk increases in the market when the NYSEBP is greater than 70, but the demand for stocks (buying pressure) remains firmly in place and the markets have risen along with this demand.

US stocks remain firmly in first place among the five major asset categories Dorsey Wright & Associates analyzes on a relative strength basis.  The International stocks category is second, followed by Bonds, Currencies, and Commodities.  When Cash is added, it assumes the number five position just ahead of Commodities.  The International stock category continues to separate itself from Bonds as bonds stagnate and international stocks continue to provide positive gains in 2013.

The CBOE Volatility index (VIX) closed at 12.42 this past Friday falling from last Friday’s close of 13.02.  The VIX is an indicator of investor nervousness of future market changes, and the current reading suggests that the probability of a major market sell-off is subdued in the very near term.  I must remind readers that the VIX is also one of the most volatile indices in the markets and can change sharply in a down market.

The Dorsey Wright & Associates analysis suggest that middle capitalization stocks are favored, as is growth over value, and equal-weighted indexes over capitalization-weighted indexes.  Equal-weighted indexes are those where each stock in the index is weighted the same, while in capitalization-weighted indexes the larger stocks have the largest weighting consistent with their size relative to the other stocks.  On a relative strength basis, the top three major economic sectors are: Consumer Discretionary, Financials, and Health Care.  Financials and Health Care exchanged places since my previous Market Update and Commentary.  Industrials remains in fourth position followed by Real Estate.  Energy and Utilities are in the bottom two sectors.  US Treasuries and International Bonds are favored in the Bond category, while US and Developed Markets are favored within the International stock category.  Energy and Precious Metals are the favored sectors within the Commodity category.

The next two weeks will have a number of important economic reports.  Housing will be the focus of next week, while Fed Chairman Ben Bernanke is expected to address Congress on February 26^th and 27^th, and the first revision of the 4^th Quarter GDP report will be announced on Thursday, February 28th.  Other key reports include the January Consumer Price Index (21^st) and the February ISM Manufacturing Index (March 1^st).  As I noted earlier, the GDP report will be closely watched and a positive revision is expected.  Other reports are not expected to show much change from previous readings.

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

Paul L. Merritt, MBA, AIF^®, CRPC®

Principal

NTrust Wealth Management

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

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

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

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

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

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

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

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

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

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

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

A series of generally positive economic reports pushed major US and International indexes higher last week.  Monthly jobs gains, manufacturing activity, and continued strength in the housing market were all modestly positive and managed to overcome a stubbornly high unemployment rate (7.9%) and a surprise contraction in the 1^st quarter real Gross Domestic Product (GDP) of -0.1%.  Helping to fuel market gains has been the strong inflow of cash back into both the stock and bond markets during the first three weeks of January according to data quoted by Bloomberg and the Investment Company Institute.  With the first major fiscal cliff crisis avoided by Congress, I believe investors have become more confident in the near-term and have begun to take more aggressive investment positions in the markets.  For now, the perceived absence of imminent recession or financial collapse has now propelled markets to highs not seen in five years.

The Dow Jones Industrial Average (DJIA) has gained 6.9% this year (January plus the first day of February) ending the week at 14,010,  The S&P 500 is up 6.1%, the mid and small capitalization-heavy Russell 2000 is up a strong 7.3%, while the technology-heavy NASDAQ Composite index is up 4.1%.  I will have more to say shortly about the old adage, “As January goes, so goes the rest of the year.”

The major US economic sectors are all positive for the year.  Energy leads the eleven economic sectors that I track with a 9.0% gain followed by Health Care, Financials and Industrials.  These top four performing sectors have all out-performed the DJIA at this point.  Information Technology (+3.4%), Real Estate (+4.4%), and Telecom (+4.8%) are the bottom three performing sectors.

International markets have continued to improve along with US markets.  The MSCI EAFE index has posted a 5.8% gain so far in 2013, and the European-based STOXX 600 is up 3.0%.  Growth has been a bit uneven around the globe with the Asia/Pacific region up 2.8% and the Americas region (which includes the US) is up 6.0%.  Developed markets are up 5.6% compared to Emerging markets that are up 3.8%.  Japan, the United Kingdom, and China are all up 7% or better leading most of the world’s countries in performance. 

Bonds overall are down year-to-date as measured by the Barclays Aggregate Bond index which has fallen 0.8%.  With investor appetite in risk apparently increasing, the safe-haven investments such as US Treasuries and Corporate bonds have sold off.  The current yield on the US 10-year Treasury closed above 2% for the first time since mid-April 2012, and the US 30-year closed at 3.223%, its highest level since the first week of April last year.  Surveying the many bond sectors that I follow, the best performing sectors so far this year have been those most closely correlated to the stock market: high-yield, convertibles, preferreds, and emerging market bonds.  The weakest performing bond sectors have been long-duration US Treasuries, corporate, and other high-quality bonds.  I do not think any of the pundits are surprised at the bond market’s performance given increasing investor appetite for risk.

The US Dollar index is down 0.9% a month into the year as investors continue to shed the US Dollar.  This move is consistent with other “risk-on” trades as fears of the European debt crisis subside.  The Euro reached $1.364 marking its highest close since November 2011.  The stronger Euro is now becoming a concern within Europe because this currency shift away from the US Dollar is making European exports more expensive and threatens an already fragile European economy.  Two reporters from the Wall Street Journal, Stephen Bernard and Vincent Cignarella, suggested in their article, “In Currency Wars, Balance Sheets Always Matter, that central banks have more influence than some have thought as currency weaknesses are becoming more and more correlated.  When central banks push massive amounts of cash into their economies as the US Federal Reserve has been doing with its latest round of quantitative easing, their currencies weaken.  For those of us who believe in the most basic economic theory of supply and demand, this makes perfect sense.  The more of anything will lower its value.  The Japanese Yen has weakened significantly against the US Dollar (-5.7% year-to-date) as the new Japanese prime minister has publicly called for new massive quantitative easing since his election last December.  While it may be too early to say if these trends will remain in place for any length of time, they certainly are worth watching.

Commodities continue to lag in 2013.  The Green Haven Continuous Commodity index, a broad commodity index, fell last week and is up just 2.8% for the year.  WTI Oil, however, continues to rise closing Friday at $97.77 per barrel.  I have no doubt that you have seen the price of gas moving steadily higher at the pump.  For the year, WTI Oil is now up 6.6%.  Gold finished Friday at $1670.60 per ounce and is now down 0.2% for the year.  I believe that gold has found a near-term equilibrium in demand and supply, and it remains to be seen if a catalyst comes along to move the price much higher or lower. 

THE TIDE OF FEAR CONTINUES TO EBB

The S&P 500’s gain of 5.0% last month is the twelfth best start to a year since January since 1950.  Naysayers can point to the recent 4^th quarter GDP growth (-0.1%) and chronically high unemployment as two key statistics that suggest there is a certain irrationality in this move.  I share a degree of skepticism about the long-term strength of the US economy, but I believe investors are shaking off their most ardent fears about pending economic calamity and realizing that even with the dysfunctional state of US fiscal policy, the US economy is still plodding along in spite of ourselves. 

Now that we are past the first fiscal cliff, I believe the consensus of professional economists and money managers continues to be that Congress will come to yet another compromise after much rancor and demagoguery.  The solution will not likely address the key fundamental issues of an ever-expanding Federal appetite for spending, but I believe it will offer some relief from the uncertainty that has created so much fear in investors.  I am doubtful that we will see a robust economy in 2013, but there is no indication at this time that we will fall into another recession.  And since most investors thought another recession was just around the corner, stocks and other risky assets were abandoned and even completely avoided by many investors.  This sentiment is translating into greater risk-taking in financial markets.

Evidence of improving investor sentiment comes from the analytical service, Lipper, Inc., that just reported flows into managed stock investments grew to $34.2 billion over the past four weeks exceeding the net gain for all of 2012 and was the largest four-week inflow since 1996.  Statistics like this help explain the solid gains in major market indexes, but they are also considered a warning sign by market skeptics.  I also believe that as we approach the all-time high of the DJIA, the media will be full of stories suggesting that the markets are severely over-valued.  We are all influenced by our recent experiences of 2007 when the DJIA passed 14,000 only to see a market correction of over 50% in 2008 and 2009.  Will we hold here—that is a big unknown; however, the climate of fear has subsided and more and more investors are jumping back into stocks in a big way for the first time since the Great Recession.  In my opinion, moving through and staying above 14,000 will be an important positive signal.

LOOKING AHEAD

At the top of this report I repeated an old investor adage, “As goes January, so goes the rest of the year.”  The most recent data published in the Stock Traders Almanac: 2013 (page 16), notes that this adage has been wrong just seven times in 62 years.  The most recent error occurred in 2009 when the S&P 500 was down 8.6% in January and ended up 23.5% for the year.  The last time January had a positive start and the S&P 500 ended down for the year was 2001.  I would never suggest that after such a great start to the year we will undoubtedly finish up at the end of the year, I do believe the odds seem to indicate we have a better chance of ending the year on a positive note.  As interesting as these types of adages are, I rely on technical indicators to guide my investment decisions, not an old adage.

As pleased as I am by the start of the (Source:  Dorsey Wright & Investments) year, I am also highly aware that markets do not move straight up or down over the course of days, weeks, or months.  I believe there will most likely be corrections during the course of this year, and how severe a correction turns out to be is ultimately determined by factors that we are completely incapable of knowing ahead of time.

The New York Stock Exchange Bullish Percent (NYSEBP) closed Friday at 74.06 marking the fourth consecutive weekly gain.  It is also an indicator of the elevated risk currently in the markets.  Any reading over 70 suggests that markets may be poised for some kind of pullback, but not necessarily tomorrow.  On average, the NYSEBP remains above 70 for 96 days.  It also reminds us of the recent strength in the market, and US Stocks continues to be the most favored of the five major asset categories I follow.  The International Stocks category just passed Bonds to assume the number two position pushing Bonds to third.  Foreign Currencies remain in fourth position and the Commodities category remains firmly in last place.

The CBOE Volatility index (VIX) decreased again last week to close at 12.9.  The VIX is an indicator of investor nervousness of future market changes, and the current reading suggests that the probability of a major market sell-off is subdued in the very near term.  I must remind readers that the VIX is also one of the most volatile indices in the markets and can change sharply in a down market.
My Dorsey Wright & Associates analysis suggest that middle capitalization stocks are favored, as is growth over value, and equal-weighted indexes over capitalization-weighted indexes.  Equal-weighted indexes are those where each stock in the index is weighted the same, while in capitalization-weighted indexes the larger stocks have the largest weighting consistent with their size relative to the other stocks.  On a relative strength basis, the top three major economic sectors are unchanged: Consumer Discretionary, Health Care, and Financials.  Industrials is in fourth position followed by Real Estate.  With the struggles of Apple, Information Technology has moved from sixth to ninth place.  Energy and Utilities are in the bottom two sectors.  US Treasuries and International Bonds are favored in the Bond category, while US and Developed Markets are favored within the International stock category.  Energy and Precious Metals are the favored sectors within the Commodity category.

The coming week has relatively few major economic reports due to be released, however, the following week will see the all-important January Retail Sales announcement on February 13^th and January Industrial Production due out on the 15^th.  Consensus numbers have yet to be released for either of these reports, however, they will be important as an early barometer on how the first quarter GDP number may be headed.

As always, it is imperative to be vigilant and not to let the recent market strength lull you into a false sense of expectation that the markets will continue to rise at these most recent rates.

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

Paul L. Merritt, MBA, AIF^®, CRPC®

Principal

NTrust Wealth Management

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

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

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

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

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

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

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

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

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

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

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