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Market Update - June 23, 2017

Economic Comment

Well, we are entering the dreaded time during the quarter when earnings reports and economic reports start to dwindle and the equity markets are more affected by headlines than anything else. However, the latest FactSet Data for the 2nd quarter, noted that nearly half of the S&P 500 Earnings Growth was due to Energy Stocks. (FactSet John Butters, Friday June 16th, 2017) Oil and oil stocks have experienced a pullback the last two weeks, so it will be interesting to see how this sector finishes the year. It has been several weeks, so let us check our indicators.

Bullish Percent’s, (Data source: Dorsey Wright, See definitions at the end of this report.)

10 Week- Bullish Percent (Short-term): The 10- week indicator ends the month of May right at 50%. Since then, it has managed to extend to 62%, which happens to be the same high as April. This level is slightly overbought.

Optionable-Stock Bullish Percent (Intermediate term): Still on DEFENSE, this indicator has floated up to 57%. It would have to get to 62% to reverse up.

NYSE Bullish Percent (NYSEBP) (Longer-term): Still on DEFENSE and now at 61%. No real movement here even with the rally in Financials. (Source: Dorsey Wright)

Point and Figure Charts (Source: Dorsey Wright)

S&P 500: After a brief consolidation between 2,420 and 2,440, the S&P 500 has broken out to a new high at 2,450. (Source: Dorsey Wright Website)

S&P 500

SP500 6.23.17

Horizontal Axis: Time (numbers represent months, for example, 1=January 2=February and so on, when you reach October, months are represented as letters, A= October, B= November & C= December).
Vertical Axis: Price

Crude Oil (continuous contract)

Crude Oil: Much has been made in the press about the selloff in the last two weeks in crude oil. We would like to present a different idea. The move from the low in 2016 of $26 per barrel to a high in January of $55 was a large broad move. A 50% pullback from the high at $55 would be $41. This would be a normal pullback from such a large move such as what was seen in 2016. (Source: Dorsey Wright Website)

Crude Oil (continuous contract)

ContinuousCrudeOil 6.23.17

Horizontal Axis: Time (numbers represent months, for example, 1=January 2=February and so on, when you reach October, months are represented as letters, A= October, B= November & C= December).
Vertical Axis: Price

US 10- Year Treasury note: There seems to be two schools of thought as to what is affecting the continued decline to lower yields in the 10-year treasury. One school of thought is that the bond market is telling us the US Economy is going into a recession. Another school of thought is that with global yields so low, international investors have to buy US bonds. Either way, the 10- year keeps drifting lower putting the next target at 2%. (Source: Dorsey Wright Website)

10-year Treasury

10YearTreasury 6.23.17

Horizontal Axis: Time (numbers represent months, for example, 1=January 2=February and so on, when you reach October, months are represented as letters, A= October, B= November & C= December).
Vertical Axis: Price

Relative Strength: Some changes this week! Domestic Equities are #1, International Equities #2, Fixed Income #3, Cash #4, Commodities #5 and Currencies #6. (Source: Dorsey Wright Website)

Two weeks ago, the FAANG stocks sold off on Friday and Monday to the tune of a quick 10-15%. They have since recovered. However, are lower oil prices really a result of an oil glut or are they foretelling a recession? Are lower bond yields another sign of a slowing economy? The Atlanta FED GDP now forecast for the 2nd quarter of 2017 continues a downward path as well. (Atlanta Federal Reserve Website). The S&P 500 rallied to new highs on lower volume, a lower advance/decline line and with fewer stocks making new highs. This could be the setup for the beginnings of a more serious stock market pull back over the summer. We have been positioned defensively; and will continue to do so for our clients!

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Bullish Percent Definitions

NYSE Bullish Percent: This is a major market indicator, which tells us whether to be on the offense or defense. It is calculated by dividing the number of NYSE stocks trading on point and figure buy signals by the total listed on the Exchange. The percent of stocks on buy signals in is then plotted on a grid from 0% to 100%, where each box equals 2%. Levels above 70% are generally considered overbought, and below 30% are considered oversold. The best buy signals come when the NYSE Bullish Percent goes below 30% and then reverses up (must reverse 6%). The best sell signals come when the indicator moves above 70% and then reverses below 70%. The most important concept to keep in mind is field position and what team is on the field. When the NYSE Bullish Percent is in X's, the offensive team is on the field and wealth accumulation strategies are the focus. Conversely, when the NYSE Bullish Percent is in O's, the defensive team is on the field and wealth preservation strategies are the focus.

The Bullish Percent can also be calculated on various indices, for example, the 10-week BP is a short-term indicator and is calculated on 10 weeks’ worth of NYSE price data. The optionable stock bullish percent is calculated off the index of all optionable stocks on the NYSE.

Asset Indexes

An index is unmanaged and not available for direct investment.
Dow Jones Industrial Average is a price-weighted average of 30 U.S. stocks traded on the New York Stock Exchange and NASDAQ.
Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.
S&P 500 Index is a capitalization-weighted index calculated on a total-return basis with dividends reinvested. The index includes 500 widely held U.S. market industrial, utility, transportation and financial companies.
A 10-year treasury note is a debt obligation issued by the United States government that matures in 10 years. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity.

The NYSE Composite (^NYA) is a stock market index covering all common stock listed on the New York Stock Exchange, including American depositary receipts, real estate investment trusts, tracking stocks, and foreign listings.

Historical Futures Prices: Crude Oil Futures, Continuous Contract #1. Non-adjusted price based on spot-month continuous contract calculations. Raw data from CME. For more on the roll algorithm used please see this page: https://ww.quandl.com/collections/futures/continuous.


Relative Strength Calculation Explained: Tactical decisions are made utilizing the research and evaluation techniques of Dorsey, Wright & Associates who has extensive expertise in a technique known as Point & Figure charting. This type of analysis attempts to evaluate the supply and demand forces of particular asset classes and ranks the asset classes from strongest to weakest based upon relative strength (RS). We feel asset classes can be ranked similar to the way one might rank sports teams. If you think about your favorite sport, they rank teams based upon how well they perform against their opponents. The more games, matches or races won, the higher in ranking the team will go. We believe the same thing can be done in the investment markets. In the financial markets, a “game” is played each day and it consists of comparing the daily performance of one asset class to another. Each day we compare asset classes to one another to determine which asset classes are the strongest or weakest compared to one another. The ranking process is comprised of the following 4 steps and represents DWA's Tactical Portfolio Research strategy ("the strategy").

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