Trend Report6/2017

Table of Contents

• Macroeconomic Data• Atlanta FED GDP Now• ECRI Leading Economic Indicators• Citi Economic Surprise Index

• Intermarket Relationships-Trends• Stocks vs. Bonds• Stocks vs. Gold• High Yield vs. Treasuries• International vs. US stocks

• Valuations• Market Cap to GDP

SummaryThe Good…

• Economic growth continues to demonstrate that we are in the midst of a recovery from the 2015-2016 industrial recession.

• Stocks remain the strongest asset class overall.

• Intermarket relationships suggest that we remain in a risk-on environment.

The Bad…

• Commodities and inflation sensitive asset classes are weak and may indicate that reflation has peaked.

• Small-cap stocks have weakened considerably, after surging to the top ranked asset class on the back of election results.

• The Citi Economic Surprise Index has broken down, showing that recent economic data has not been encouraging.

The Ugly…

• Market Capitalization is now at 133% of GDP.

• Market valuations of even close to this magnitude typically reward investors with nasty declines.

What Should We Do?...

• Follow the trend and stay with the momentum of the market.

• Buy strength and sell weakness.

• Pay close attention for potential trend reversals in key intermarket relationships.

• The Atlanta Fed GDPNow real GDP forecast for Q2 is currently at 2.9 percent.

• The chart illustrates the decline in this estimate since the beginning of the quarter, falling from a starting point of over 4 percent.

• Economic data continues to expand as we rebound from the industrial recession of 2015-2016.

• It will be interesting to see if growth can continue to accelerate.

• The ECRI Weekly Leading Index remains in a positive trend since bottoming in early 2016.

• The index has since surged to new highs.

• Lately, the leading index has stalled and is consolidating.

• Consolidations can be continuation patterns.

• Will the leading index continue upward or is a trend change upon us?

• The Citi Economic Surprise Index for the US has broken down significantly over the past several weeks.

• The chart illustrates the break of a rising support line (courtesy of Raoul Pal) and indicates that this could continue to move lower.

• The economic surprise index measures whether the economic data reported is surprising to the upside or disappointing to the downside.

• Recent data has not been encouraging.

• US stocks are in a positive trend relative to the broad US bond market.

• The ratio of SPY to AGG illustrates that stocks have been strong compared to bonds.

• Momentum is starting to wane however.

• If this ratio breaks down in the coming weeks/months, a long-term top may be in place.

• We will look for the 13 week moving average to cross below the 21 week moving average for confirmation of a top in the market.

• Stocks remain stronger than gold suggesting a risk-on environment.

• When the ratio of SPY to GLD is moving up, it means that stocks are stronger. When the ratio is moving down, stocks are weaker than gold.

• Gold is a defensive asset and therefore this relationship tells us a lot about the risk appetite of market participants.

• The ratio seems to be consolidating after breaking out to the upside in 2016.

• High Yield bonds are favored over Treasury bonds.

• When the ratio of HYG (high yield) to IEI (3-7 year Treasury bonds) is moving up, high yield bonds are stronger than Treasuries.

• This relationship helps us determine risk appetite among market participants within fixed income.

• Currently the trend is up suggesting a risk-on market environment.

• The SPY to VEU ratio helps us determine whether international or domestic stocks are optimal.

• When the ratio is moving upward, US stocks are showing positive relative strength compared to international stocks.

• If the ratio is falling, international stocks are stronger than US equities.

• The ratio peaked in late 2016, and since then international equities have been stronger than US stocks.

• Since 2011, these moves have been transitory, as US stocks often regain the lead in short-order.

• Is this time different?

Asset Class-Relative Strength

Symbol Description Ranking

VEA International Stocks 1

VWO Emerging Markets 2

VT Total World Market 3

GLD Gold 4

VV Large Cap 5

VO Mid Cap Stocks 6

VTI Total US Market 7

LQD Corporate Bonds 8

HYG High Yield Bonds 9

VB Small Cap Stocks 10

IEF Treasury Bonds 11

TIP Inflation Protected Securities 12

DBC Commodities 13

• International and emerging market stocks remain the top ranked asset classes from a relative strength perspective.

• Commodities are the weakest asset class.

• Small caps have weakened considerably.

• Market Capitalization to GDP suggests that we are now in one of the most overvalued markets of all time.

• To compare, the secular bear market in the 1970’s started from a level of 85%. Today we are at 133%.

• The bear market bottomed at below 35%.

• In 2007 we peaked at 108.8% before collapsing to below 50%.

• The only other time this market was this overpriced was in the tech bubble where the Nasdaq subsequently collapsed over 80%.

Disclosure

The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon

request. Past performance cannot guarantee future results.

All Charts were derived from the following data sources: www.econ.yale.edu/~shiller, Global Financial Data, Standard and Poors, St Louis Federal Reserve, and Stockcharts.com

Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decisions. The S&P 500 is not an investable index and is a product of

Standard and Poors, a McGraw-Hill Company.

Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high-yield bonds, which have lower ratings and are subject to volatility. All fixed income

investments may be worth less than original cost upon redemption or maturity.

Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of risks associated with common

stocks, including market fluctuations. While stocks generally have a greater potential return than government bonds and treasury bills, they involve a higher degree of risk. Government bonds and treasury bills, unlike stocks, are

guaranteed as to payment of principal and interest by the US Government if held to maturity.

Dividends are not guaranteed and are subject to change or elimination

Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price

volatility. These risks are heightened in emerging markets.

Asset-backed securities: Generally, when interest rates decline, prepayments accelerate beyond initial pricing assumptions which could cause the average life and expected maturity of the securities to shorten. Conversely when

interest rates rise, prepayments slow down beyond the initial pricing assumptions and cause the average life and expected maturity of the securities to extend and the market value.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES

SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO

HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE

OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY

SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. PAST RESULTS DO

NOT GUARANTEE FUTURE RETURNS HYPOTHETICAL PERFORMANCE FOR ILLUSTRATION PURPOSES ONLY.