SPECIAL REPORT

Note: I have been working to publish my Market Update and Commentary on a bi-weekly schedule, and considering my travel schedule, I indicated last week that my next Update would not be published until July 7th. However, I am writing this Special Report to address last week’s market actions.

“Markets are always worth listening to, but sometimes they are also hard to figure. We’ll admit to putting Thursday’s global stock-market and commodities rout in that category.”

--Wall Street Journal Editorial, June 20, 2013

I could not think of a more appropriate commentary with which to begin my Special Report. The sell-off of 560 points (3.7%) in the Dow Jones Industrial Average (DJIA) in just over a day’s worth of trading from Wednesday afternoon through close of markets on Thursday has certainly raised the nervousness level in many investors. Markets sell off all the time, but why would the editorial board of the Wall Street Journal be left to publicly scratch their heads over last week’s action?

The answer requires a look at the Federal Reserve. If you read Federal Reserve Chairman Ben Bernanke’s official statement and listened to his press briefing Wednesday afternoon, his message was very clear. He is suggesting that the economy’s strength, not weakness, is the reason why he feels that the potential exists to consider reducing the level of bond purchases the Fed is making sometime late this year or early next. He also made the strong point that he has no intention to curtail bond purchases and raise short-term interest rates at the same time. He said that he would consider raising interest rates only if the unemployment rate fell to 6.5%. The message of an improving economy by the Fed is typically not the basis for a market sell-off and hence the statement by the Wall Street Journal.

I noted in my last Market Update and Commentary that there was nearly 100% consensus that the Fed would curtail its bond purchase program (also known as Qualitative Easing III) at some point, but there was little consensus of when it would begin. The Chairman clarified his position on Wednesday and the markets sold-off. I am struck by a couple of points of in-congruence between what the markets expected and received, followed by the market sell-off. First, economists and pundits had been criticizing Mr. Bernanke for his lack of clarity regarding QE III following the May Federal Open Market Committee (FOMC) meeting. Now he is being criticized in some circles (including St. Louis Fed Chairman James Bullard) for putting a timeframe and thus clarity around his future actions. Second, many critics of Mr. Bernanke have been saying for some time that the unending bond purchases by the Fed are hurting the future economy. So now when he says that an improving economy may be setting the conditions to allow for slowing and ultimately eliminating QE III, the markets sell off. Mr. Bernanke has been telegraphing his intentions for some time now that steady economic growth—precisely what Mr. Bernanke has be saying would be grounds for curtailment and ultimately termination of QE III, actually gave the markets what they expected. In my opinion, the outcome of last week’s FOMC meeting should be viewed as a net positive.

SORTING IT ALL OUT

While I may believe that last week’s Fed action will ultimately be a good thing, the stock and bond markets are acting like a drug addict going cold turkey. I am using this rather unpleasant analogy because that is the most common analogy I saw used this past weekend in the financial press, and it is a powerful way to try to explain what is going on. The story goes something like this. The economy has become addicted to the easy money that has been provided by the Fed. The economy got a temporary rush of euphoria that has felt great, but the euphoria is false and cannot last. Cold sweats set in when the easy money drug is reduced and ultimately stopped. The addicted economy goes through a somewhat unpleasant withdrawal, but ultimately finds peace and balance without the need of the artificial stimulus. This is a rather simplistic way to look at the markets today, but so far it appears to be accurate.

The rapid rise in interest rates is, in my opinion, the most disruptive aspect of last week. The US 10-year
Treasury yield has now jumped nearly 1% (88 basis points) since the end of April when the 10-year yield closed at 1.666%. Friday it closed at 2.542%. The size and speed of this jump is something we have not

seen in years and is certainly putting pressure on bond prices everywhere (bond prices fall when interest rates go up). I have learned long ago that predicting interest rates is without a doubt the hardest and most inexact endeavor economists undertake, however, as you can see by the chart below, the recent move upwards is barely a blip. This does not diminish the loss of principal bond holders have felt, but it is important that many economists see the 10-year Treasury yield as barometer of future economic growth and inflation, and given the lackluster growth of the economy, interest rates are probably closer to the top than the bottom. That said, I still believe that investors must pay a great deal of attention to their bond portfolios today.

From an equity stand point, I believe that a pause or moderate correction has started. Stocks markets are now off about 5% from the peak towards the end of May. When I look at my key technical indicators, I see the pressure of equity prices easing, but I also see that the momentum has turned enough to suggest that there could be more weakness ahead for the near future. This market is potentially setting up a buying opportunity for investors.

Going into what may again prove to be a volatile week, the prudent investor should check their portfolios security by security. Consider trimming positions if you are surpassing your ability to sleep comfortably at night, or tighten up sell-stops and then let the market dictate which stocks will be eliminated from your portfolio for now. Finally, look at the bonds. For most investors, the goal should be to keep maturities short (less than 7 years), evaluate your bond sectors and think about reducing interest rate risk and focus more on credit risk. I suggest this because in today’s markets, the risk to your bond portfolios losing value due to interest rates rising, in my opinion, is greater than the risk of a company going bankrupt.

In summary, we are in a volatile period. Markets are reacting to the new realities that the Federal Reserve will not be buying bonds forever. However, I believe the message for the markets is a very positive one and I am glad to know that the end of QE III is a possibility. Don’t be complacent—I’m not. Review your portfolios and monitor your holdings, and call me if you have any questions.

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.

Market volatility has returned to stock markets these past few weeks, but up until this point, has had minimal impact on US stock markets generally. During the first two weeks of June, the major US stock indexes

rallied in the first week and sold off in the second leaving most indexes within a half percent of where the month started. After reviewing a wide variety of financial publications, there appears to be consensus that uncertainty about when the Federal Reserve will begin to taper back its current bond purchases is causing the most recent volatility. Most investors are hoping that the when Fed Chairman Bernanke speaks this

Wednesday afternoon following the Open Market Committee meeting, he will provide greater clarity about the Fed’s intentions and relieve some of the uncertainty overhanging the market.


Two weeks of trading into June, the Dow Jones Industrial Average (DJIA) is down 0.30% closing Friday at 15,070. The S&P 500 is off 0.25%, the Russell 2000 is down 0.28%, and the NASDAQ has dropped 0.94%. Year-to-date the DJIA is up 15.0%, the S&P 500 is up 14.1%, the Russell 2000 has gained 15.5%, and the NASDAQ is up 13.4%. To put this year-to-date performance into perspective, if the year had ended Friday, the S&P 500 would have its 17th best year out of the past 39 going back to 1975, and the second best year in the past ten. One last data point to consider: since the markets generally peaked around the third week in May, the DJIA is off 2.20%, the S&P 500 is down 2.54%, the Russell 2000 is down 1.66%, and the NASDAQ is off 2.24%. So while we have seen weaker markets, at this point the correction should be considered mild so far.

The top performing sectors over the first two weeks of June were Telecom (2.3%), Consumer Staples (1.5%), Utilities (0.6%), Health Care (0.3%), and Consumer Discretionary (0.1%)—all ahead of the broad stock indexes. Information Technology (-1.6%), Financials (-1.6%), Real Estate (-1.2%), and Energy (-1.1%) were the weakest performers. For the year, Health Care is the clear performance leader with a gain of about 22%, followed by Consumer Discretionary (20%), and Consumer Staples (18%). The weakest sectors for the year are Real Estate (7%), Materials (7%), and Information Technology (10%).

International stocks continue to lag US stocks for the first two weeks of June and the year. The Dow Jones Global Ex-US index is down 2.1% so far in June and is up just 1.9% for 2013. The European-focused STOXX 600 is down 3.2% since the end of May, as is the Asia/Pacific Region. Emerging Markets have been hit hard losing 5.4% over the past two weeks. The news regarding weak economic growth and employment, I believe, is contributing to the current market performance in Europe. The Emerging Markets are struggling with weakness both in Europe and China (China’s economic growth has been slowing all through 2013), and to an extent, the currency devaluation by Japan. The Asia/Pacific region is home for many of the emerging market countries, so it makes sense that this region is under pressure.

US Treasury yields rose last week for the first time in the past seven weeks prompting a bit of a relief for bondholders. The gains were not enough, however, to push the Barclays Aggregate Bond index into the black the month of June. After two weeks, the Barclays was down 0.1% for the month. The best performing bond sectors in June are Short-Term International Treasuries (3.2%), Short-Term US Treasuries (0.6%), and Intermediate Treasuries (0.2%). The weakest bond sectors are High-Yield Municipals (-4.6%), National Insured Municipals (-3.8%), and Preferreds (-2.0%). Municipal bonds of all types have shown weakness and these investor-important bond sectors, I believe, are under selling pressure because of headlines about possible municipal bankruptcies in Stockton, CA, and Detroit, MI. In case you missed Friday’s news, the current trustee for the city of Detroit, Kevyn Orr, announced that Detroit was immediately suspending payments of $35 million on $2.5 billion of unsecured bonds prompting fears among bondholders that this is the first stage towards bankruptcy. Mr. Orr told investors that he would over them around 10 cents on the dollar for their investments or face losing everything. While it is expected that some key investors such as the city worker unions will fight any efforts to reduce payouts or benefits, the economic reality is that Detroit is broke with little hope of surviving without a major restructuring of its debts and obligations. This will be an important test case for numerous other cities that are burdened with overwhelming debt and a possible blue print to handle such situations. This is why municipal bondholders around the country are watching this situation very closely.

The commodity situation has not improved, however, the rate of decline has slowed in June helped by rising oil prices. The DJ UBS Commodity index, a broad measure of commodity prices, fell 0.3% over the past two weeks, but this is an improvement over the 2.3% decline in May. WTI Oil has risen 6.4% this month primarily on fears that the Syrian civil war could be escalating after news from the White House that it would arm the rebel forces. Oil traders are getting nervous that Russia’s and Iran’s involvement in support of Syria’s President, Bashar al-Assad, could result in a broader regional conflict. As of Friday’s close, a barrel of WTI Oil cost $97.85, its highest close since mid-February. Gold prices also rallied slightly last week, but remains down 0.4% for June closing at $1387.60 an ounce. Gold has now lost $208.10 (-17.1%) for the year. Commodities are generally a key barometer about overall global growth as demand increases with economic activity. However, the generally weak commodity prices are in keeping with the very slow pace of economic recovery here and abroad.

TRYING TO READ THE FED’S OUIJA BOARD

Ever since last month’s announcement by Fed Chairman Bernanke that the Federal Reserve could begin to taper its bond purchase program (also called Quantitative Easing III, or QE III) sooner than expected due to an improving economy, markets have been in turmoil trying to figure out just when this tapering would be. I believe I am safe to say that there is near 100% consensus among economists that bond purchases cannot go on forever; however, there is little, if any, agreement about when this latest round of quantitative easing should begin to end and by how much.

I made the case recently that the Fed is really just playing around the edges of the economy, and as much as $85 billion in monthly bond purchases sounds massive, it is actually fairly insignificant in comparison to the multi-trillion dollar bond market here in the US. However, I am also extremely sensitive that perceptions matter as much, if not more, than the actual numbers. Just look at how the European Union (EU) was given a major reprieve last summer when Mario Draghi, president of the European Central Bank (ECB), calmed markets by simply stating that he would do “whatever it takes” to protect the EU and the Euro. Interest rates there fell dramatically and yet he has not had to expand the ECB balance sheet much or make loans to some of the weaker EU countries like Spain. Mr. Bernanke’s actions over the past several years have had a similar calming effect, which is why his comments last month had a meaningful impact on interest rates and has likely contributed to the volatility in the stock markets.

Economists and investors have received little economic data to suggest the US economy is growing at a strong and sustainable rate. In fact, recent data has consistently shown that the economy is stuck in a very modest expansion. Some data sets are good, others not so much, while still others do not show much of anything. However, the economy IS expanding, and I believe that has helped pushed the stock market into decent gains so far this year. The bar of investor expectations has been set very low and any real improvement helps propel the markets forward.

A key data point to consider when trying to decipher the Federal Reserve’s statements is that inflation has remained well below the 2% standard set by the Fed as a trigger point to begin curtailing bond purchases. The most recently published data on inflation show that the current rate of inflation is just 1.2%. As economists and investors digest this number, and the May employment report which pushed the overall unemployment rate up 0.1% to 7.6%, they realize that the Fed may not have to act as soon as many were anticipating to curtail bond purchases. I believe it was this realization that helped push US Treasury yields down slightly last week.

Like it or not, Mr. Bernanke’s news conference this Wednesday afternoon will be of great importance, and how he discusses the timing and scope of curtailing bond purchases will undoubtedly affect the psyche of investors and push the markets around as it has done for the past month. I am not trying to read Mr. Bernanke’s Ouija board, but I do believe he has the obligation to provide clarity to his intentions. Let us hope he does so.

LOOKING AHEAD

Mr. Bernanke’s comments on Wednesday will be the most closely watched economic event next week.

However, there will also be a couple of other key reports that will be indicators of economic growth. Several regional Fed reports on manufacturing activity around the country are due out during the week, the May Consumer Price Index (CPI) and May Housing Starts on Tuesday, and Existing Home Sales on Thursday. Each of the reports are expected to show slight improvements in what is a very, very sluggish economy. The key is to see if the economy is contracting or expanding, and consensus is anticipating a sluggish expansion.

I continue to favor stocks over bonds, currencies and commodities. As those of you who have read my Market Updates and Commentary for some time now realize that my recommendations are based upon the trends I see in the market, not by trying to predict the future. I continue to follow this premise and thus I believe that stocks are favored for now; however, sector selection is critical because strength in this market has been more selective than in recent years. On a relative strength basis, the strongest sectors are Consumer Discretionary, Health Care, and Financials. Energy, Utilities, and Information Technology are the weakest.

Also, as I noted in my last Update and Commentary, summer is traditionally the weakest period for stocks. So far this is holding true and is following the example of recent years. While the first five months of the year were strong, we have seen a pullback in stocks and we are off our highs for the year as I noted earlier. However, I do believe that a pause or even slight correction would be in order at this time although these pauses or corrections are never pleasant when we are experiencing them—even small ones. Looking over my data, it is my opinion that based on the past ten weeks of price history, stocks are actually fairly priced while bonds have sold off significantly. I still feel that bonds remain very expensive and I am cautious about bonds today.

I have not mentioned the G8 Summit in Ireland this week because I do not believe that any meaningful action will emerge from the conference. At best investors can hope that this meeting will get the ball rolling on some meaningful cooperation and trade agreements that will foster growth around the world.

My next Market Update and Commentary will be published in three 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.

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.

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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.