Ned Davis6.15

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MARKET DIGEST Ned Davis Research Group PUBLISHED MONTHLY JUNE 2015 Please see important disclosures at the end of this report. www.ndr.com | Periodical | Issue #MKTDG20150615 1 Tony Welch, CMT ETF Strategist Tim Hayes, CMT Chief Global Investment Strategist FOLLOW US: U.S. Europe ex. U.K. Emerging Markets U.K. Japan Pacific ex. Japan Canada NDR Allocation: Benchmark Weight: 60.0 50.9 11.0 15.7 14.0 10.7 0.0 7.3 15.0 7.5 0.0 4.3 0.0 3.6 Bull Still Running, but Less Margin for Error ECONOMY AND BONDS ` Global Economy: Strength in U.S., Mexico, and Europe, weakness in emerging economies. ` U.S. Economy: Moderate economic growth and subdued inflation in 2015. ` Bonds: We are slightly underweight at 95% of benchmark duration. U.S. ASSET ALLOCATION GLOBAL ASSET ALLOCATION Baseline allocation is 55% Stocks, 35% Bonds, and 10% Cash. This is considered a conservative portfolio allocation for investors who are not risk-tolerant. (This should be used for illustrative purposes only.) See Glossary for more information on Asset Allocation. Global Overview 2-3 U.S. Market 4-5 Sectors & Industries 6-7 Global Economic Outlook 8-9 U.S. Economy and Bonds 10 Ned's Corner 11 Glossary of Terms 12-13 Overweight Underweight Stocks Bonds, Cash REGIONAL STOCKS 70% CASH 5% BONDS 25% CASH 5% STOCKS 70% BONDS 25% S&P 500 Sector Current View Effective Date Consumer Discretionary Overweight 2015-04-01 Consumer Staples Overweight 2015-02-05 Health Care Overweight 2013-04-10 Information Technology Overweight 2014-02-12 Financials Marketweight 2014-12-03 Industrials Marketweight 2014-03-05 Utilities Marketweight 2015-01-07 Energy Underweight 2015-01-14 Materials Underweight 2014-12-03 Telecom Services Underweight 2015-01-07 Source: Standard & Poor’s and Current View: Ned Davis Research, Inc. September Rate Hike

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MARKET DIGESTNed DavisResearch

Group

PUBLISHED MONTHLY JUNE 2015

Please see important disclosures at the end of this report. www.ndr.com | Periodical | Issue #MKTDG201506151

Tony Welch, CMT ETF StrategistTim Hayes, CMT Chief Global Investment Strategist

FOLLOW US:

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NDR Regional Allocation Recommendations 2015-06-11

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NDR Regional Allocation Recommendations 2015-06-11

U.S.Europeex. U.K.

EmergingMarkets U.K. Japan

Pacificex. Japan Canada

NDRAllocation:

BenchmarkWeight:

60.0

50.9

11.0

15.7

14.0

10.7

0.0

7.3

15.0

7.5

0.0

4.3

0.0

3.6

Source: All data from Ned Davis Research, Inc.

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NDR Regional Allocation Recommendations 2015-06-11

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NDR Regional Allocation Recommendations 2015-06-11

U.S.Europeex. U.K.

EmergingMarkets U.K. Japan

Pacificex. Japan Canada

NDRAllocation:

BenchmarkWeight:

60.0

50.9

11.0

15.7

14.0

10.7

0.0

7.3

15.0

7.5

0.0

4.3

0.0

3.6

Source: All data from Ned Davis Research, Inc.

Bull Still Running, but Less Margin for Error

ECONOMY AND BONDS ` Global Economy: Strength in U.S., Mexico, and Europe, weakness in emerging economies.

` U.S. Economy: Moderate economic growth and subdued inflation in 2015.

` Bonds: We are slightly underweight at 95% of benchmark duration.

U.S. ASSET ALLOCATIONGLOBAL ASSET ALLOCATION

Baseline allocation is 55% Stocks, 35% Bonds, and 10% Cash. This is considered a conservative portfolio allocation for investors who are not risk-tolerant. (This should be used for illustrative purposes only.) See Glossary for more information on Asset Allocation.

Global Overview 2-3

U.S. Market 4-5

Sectors & Industries 6-7

Global Economic Outlook 8-9

U.S. Economy and Bonds 10

Ned's Corner 11

Glossary of Terms 12-13

Overweight Underweight

Stocks Bonds, Cash

REGIONAL

STOCKS70%

CASH 5%

BONDS25%

CASH 5%

STOCKS70%

BONDS25%

S&P 500 Sector Current View Effective DateConsumer Discretionary Overweight 2015-04-01

Consumer Staples Overweight 2015-02-05

Health Care Overweight 2013-04-10

Information Technology Overweight 2014-02-12

Financials Marketweight 2014-12-03

Industrials Marketweight 2014-03-05

Utilities Marketweight 2015-01-07

Energy Underweight 2015-01-14

Materials Underweight 2014-12-03

Telecom Services Underweight 2015-01-07

Source: Standard & Poor’s and Current View: Ned Davis Research, Inc.

September Rate Hike

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NED DAVIS RESEARCH GROUP Market Digest | JUNE 2015

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GLOBAL OVERVIEW

EXPECT MORE MARKET STRENGTH

The latest monthly update of our Global Balanced Account Model reflects a turn toward stock market caution, with the model dropping more than 12 percentage points in calling for 56% equities. Yet 76% of the 46 ACWI markets still have rising 200-day moving averages (below, bottom clip) while only one of nine indicators we are watching to warn of a market top (the global P/E ratio) has reached a warning level.

Expecting the uptrend to continue, we are maintaining our maximum overweight equity allocation of 70%. In our

regional equity allocation, we are continuing to recommend overweight allocation to the MSCI indices for the U.S. (still 60%) and Japan (now 15%, up from 12%). But we are downgrading Europe ex. U.K. from marketweight to underweight (down from 14% to 11%) and upgrading Emerging Markets from market-weight to overweight (up from 11% to 14%). We remain under-weight the U.K. (down from 3% to 0%), Pacific ex. Japan, and Canada (both still 0%).

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MSCI All Country World Index vs. 200-Day Moving Average Daily Data 2005-06-10 to 2015-06-10 (Log Scale)

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MSCI All Country World Index vs. 200-Day Moving Average Daily Data 2005-06-10 to 2015-06-10 (Log Scale)

200

224

251

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316

355

398

447

200

224

251

282

316

355

398

447

MSCI ACWI vs. Middle Clip Indicator

% of Mkts Above200-Day Moving Average

% Gain/Annum

% ofTime

* Above 50 7.38 72.21

Below 50 -2.25 27.79

MSCI ACWI vs. Lower Clip Indicator

% of Mkts With Rising200-Day Moving Average

% Gain/Annum

% ofTime

* Above 50 9.03 75.88

Below 50 -8.15 24.12

MSCI ACWI

0102030405060708090

100

0102030405060708090

100Percentage of 46 ACWI Markets Above 200-Day Moving Averages 2015-06-10 = 54.3%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

0102030405060708090

100

0102030405060708090

100Percentage of 46 ACWI Markets With Rising 200-Day Moving Averages 2015-06-10 = 76.1%

Moving average direction based on reversals of 0.5% or greater Source: MSCI

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WITH CHINA AND JAPAN OUTPERFORMING

The Emerging Markets Index would stand to benefit from re-newed outperformance by the MSCI China Index, which carries the most weight in the index (22%). A month ago, the China in-dex could boast of being the strongest MSCI index, up 44% over the preceding year. But the run-up had also left it overbought, with the domestic “A” shares rallying to an especially parabolic extent. And this left the market vulnerable to a sell-off. The sub-sequent decline was blamed on government moves to cool the speculation through margin trading restrictions, IPOs for China National Nuclear Power and others, and share sales of ICBC and China Construction Bank by Huijin Holdings, the Chinese state investment fund.

But the sell-off has led to a buying opportunity within a lon-ger-term uptrend that remains well intact. The People’s Bank of China remains accommodative in response to sluggish growth, a positive influence on equities. And signs of prop-

erty market improvement and bank stock resilience may be fur-ther encouragement to foreign investors who avoided the Chi-nese market last year despite consistently attractive valuations, discouraged by property market and banking system worries.

As for Japan, it has been the clear relative strength leader, first among global regions for momentum based on time frames ranging from 21 to 150 days. Boosted by another round of weakness in the yen (reaching 13.5-year lows versus the U.S. dollar), improved economic prospects, a healthier banking system, and the prospects for increased buyback activity and better corporate governance, the Nikkei Index has approached a 19-year high. Over the past year, the MSCI Japan Index has gained 36%, ranking first among the 46 All Country World In-dex component markets. The chart below shows the Japanese market has not taken on the overbought appearance that made China look vulnerable prior to the recent sell-off.

Daily Data 11/24/2008 - 6/01/2015 (Log Scale)

INF15_07A_C

439460481504528553579606635665696729764800838877919962

1008

1249130913711436150515771652173118131899199020852184228823972512263127572888 MSCI China H Shares ( Scale Left ) MSCI Japan ( ---- Scale Right )

Source: MSCI

Mov

ing

5-Y

r Z-S

core

China H Shares ( ) Japan ( ---- )

-2

-1

0

1

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-2

-1

0

1

2

3

4

MSCI China H Share & Japan Indices vs. One-Year Rates of Change

Mean Reversion (Z-Score) of Year/Year Rates-of-Change

J2009

M M J S N J2010

M M J S N J2011

M M J S N J2012

M M J S N J2013

M M J S N J2014

M M J S N J2015

M M

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INF15_07A_C

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NED DAVIS RESEARCH GROUP Market Digest | JUNE 2015

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U.S. MARKET OUTLOOK

This year, by far the most common question we have re-ceived has been about a repeat of the 2011 decline – big enough to warrant allocation adjustments to all but the longest duration portfolios, but fast enough that only the most nimble investors are able to reallocate. The simple answer to the ques-tion originally posed by then-candidate Reagan at the October 28, 1980 presidential debate, “Are you better off now than you were four years ago?” is “yes.” Summarizing the four NDR indica-tor types:

� Technical – Fewer divergences in 2015.

� Sentiment – Similar pattern YTD; watch for complacency.

� Fundamental – Worse in 2015. Higher P/Es and lower EPS growth.

� Macroeconomic – Fed is the biggest question now rather than a double dip recession.

Daily 12/31/2014 - 12/31/2015

SSF15_08E_C

Source: Federal Reserve Board

S&P 500 Peak 4/29/11

1.7

1.8

1.9

2.0

2.1

2.2

2.3

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2.7

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3.0

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2.1

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3.0

3.1

3.2

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3.4

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3.6

3.7

3.810-Year Treasury Note Yield 2015 ( )10-Year Treasury Note Yield 2011 ( )

JAN2015

FEB M A R A P R M A Y JUN JUL A U G SEP O C T N O V D E C

10-Year Treasury Note Yield -- 2015 vs. 2011

RATES MOVING IN OPPOSITE DIRECTIONS

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LESS MARGIN FOR ERROR

The valuation and earnings backdrops are worse today

than in 2011. S&P 500 forward operating P/E, trailing operat-

ing P/E, and trailing GAAP P/E ratios are all at least 340 basis

points higher today than four years ago.

Higher valuations are a function of the S&P 500 Index being

773 points higher, but EPS growth rates are drastically different.

In 2011, EPS growth was high coming off the depressed reces-

sionary levels, but decelerating. Analysts expected earnings growth to slow from 24% to 18.6% by 2Q12.

Currently, trailing operating EPS growth is -1.0%. Consensus estimates are calling for operating EPS to jump to 12.8% by 2Q16.

Higher valuations mean that there is less margin for error. If EPS growth accelerates as analysts expect, then higher valuations are justified. If not, valuations would be a bigger risk than in 2011.

(S662)

Monthly Data 2/28/1983 - 5/31/2015

32.3-Year Mean = 14.51

S&P 500 One-Year Forward Price/Earnings RatioBased on consensus operating EPS estimates for the

next fiscal year, adjusted for fiscal year-end dates.

5/31/2015 = 17.1

Source: Thomson I/B/E/S

8

10

12

14

16

18

20

22

8

10

12

14

16

18

20

22

30.5-Year Mean = 18.12

S&P 500 Trailing 4Q Price/Operating Earnings RatioBased on trailing 4Q operating earnings per share

for S&P 500 Index as reported by S&P.Operating EPS data begins 12/31/1984

Current P/E based on earnings as of 12/31/2014

5/31/2015 = 18.9

Source: S&P Dow Jones Indices121416182022242628

121416182022242628

32.3-Year Mean = 22.66

S&P 500 Trailing Price/Reported (GAAP) Earnings RatioBased on trailing 4Q reported (GAAP) earnings per share

for S&P 500 Index as reported by S&P.Current P/E based on earnings as of 12/31/2014

5/31/2015 = 20.6

2030405060708090

100110120130140

2030405060708090

100110120130140

19

84

19

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15

S&P 500 Forward & Trailing Price/Earnings Ratios

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NED DAVIS RESEARCH GROUP Market Digest | JUNE 2015

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SECTORS AND INDUSTRIES

DOLLAR UPTREND RESUMING – CONSUMER VS. COMMODITY OPPORTUNITIES

Our favorite long-term theme has us overweighting con-sumer sectors and underweighting commodity sectors. Improving employment and low inflation favors the consum-er, while we believe the super-cycle for commodities has long peaked.

Equity markets, however, are never a smooth ride. And in April, we warned of a reversal in this leadership based on our U.S. dollar indicators which had turned bearish noting, “We sus-

pect such a rotation would be short-lived, and an opportunity to add to existing consumer areas or rebalance exposures...” That opportunity now appears to be closing fast, based on our indicators which have returned to favoring an uptrend in the U.S. dollar. The chart below shows the recent correlation be-tween the dollar and the ratio of consumer to commodity sec-tors. A resumption of dollar strength should add tailwinds to consumer sectors over commodity sectors.

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Broad Consumer Sector Index / Commodity Sector Index vs. U.S. DollarDaily Data 2010-06-03 to 2015-06-02 (Log Scale)

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Broad Consumer Sector Index / Commodity Sector Index vs. U.S. DollarDaily Data 2010-06-03 to 2015-06-02 (Log Scale)

2010Jun Sep Dec

2011Mar Jun Sep Dec

2012Mar Jun Sep Dec

2013Mar Jun Sep Dec

2014Mar Jun Sep Dec

2015Mar Jun

190

180

170

160

150

140

130

120

110

190

180

170

160

150

140

130

120

110

Source: S&P Dow Jones Indices

Broad Consumer Sector Index / Commodity Sector Index 06/02/2015 = 185.6850-Day Moving Average 06/02/2015 = 184.28200-Day Moving Average 06/02/2015 = 174.09

S&P 500 Broad Consumer Sectors: Consumer Discretionary, Consumer Staples, Health CareS&P 500 Commodity Sectors: Energy, Materials

100

95

90

85

80

75

100

95

90

85

80

75

Source: IDC

Trade-Weighted U.S. Dollar Index 06/02/2015 = 95.9150-Day Moving Average 06/02/2015 = 96.59200-Day Moving Average 06/02/2015 = 91.15 U.S. DOLLAR STRENGTH ADDS TAILWINDS

TO CONSUMER VS. COMMODITY LEADERSHIP

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CONSUMER SECTORS

Health Care has been the strongest of the consumer sectors over the past year. The Supreme Court decision on whether sub-sidies can be paid to around 8.5 million health-insurance enrollees looms large later this month.  We expect a ruling to favor the Af-fordable Care Act, and see more rally potential from the hospi-tals in Facilities than the already run-up insurers in Managed Care.

We have downgraded Hypermarkets & Super Centers, but remain positive on Retailers leveraged to low-end con-sumers.  Within General Merchandisers, dollar and discount stores are particularly well positioned to benefit from a strong dollar since they are large importers. 

We remain positive on home-related names.  Strong April  housing starts and permits data have added support to the group and we look for further signs that Q2 will continue to rebound from poor weather in Q1.

CAPEX SECTORS

First revisions to Q1 capex indicated spending remained weak. R&D saw the biggest downward revisions. Capital Goods companies at the EPG Conference also indicated a continued weak outlook for Q2. However, we expect capex to pick up later in the year as economic uncertainty lifts, and companies begin to substitute capital for labor. Capex has been the miss-ing link to productivity growth.

Tech is still outpacing Industrials this year due to its lack of oil and interest-rate sensitivity.

Transports remain a marketweight and have faltered recent-ly. Airlines remain a top pick. We believe the recent pullback on capacity fears provides a good buying opportunity (below).

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U.S. Sectors & Industries: Returns (%) Daily Data 1985-10-01 to 2015-06-02 (Log Scale)

Full History: 1985-10-01 to 2015-06-02

Performance whenPercentage is:

% Gain/Annum

% ofTime

Greater than 0 16.55 48.74

* Less than or equal to 0 -6.15 51.26

Return Periods (market days):1 5 21 63 126 252

Full History Stats Data Range Stats

Data Range (years):1 2 3 5 10 20 Max

Top Bottom Hide Stats

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U.S. Sectors & Industries: Returns (%) Daily Data 1985-10-01 to 2015-06-02 (Log Scale)

Full History: 1985-10-01 to 2015-06-02

Performance whenPercentage is:

% Gain/Annum

% ofTime

Greater than 0 16.55 48.74

* Less than or equal to 0 -6.15 51.26

Return Periods (market days):1 5 21 63 126 252

Full History Stats Data Range Stats

Data Range (years):1 2 3 5 10 20 Max

Top Bottom Hide Stats

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

43

55

70

90

116

148

191

245

314

403

518

43

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70

90

116

148

191

245

314

403

518

Cap-Weighted Index Used Source: NDR Multi-Cap Institutional (Universe), S&P Capital IQ and MSCI, Inc. (GICS)

Airlines Sub-Industry 2015-06-02 = 356.18

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

20

-35

-30

-25

-20

-15

-10

-5

0

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10

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201-day % Returns of Airlines Sub-Industry 2015-06-02 = -1.14

Source: NDR Multi-Cap Institutional (Universe), S&P Capital IQ and MSCI, Inc. (GICS)

AT OR NEAR BOTTOM IN 5 OF 7 CASES...

...AFTER -8% ONE DAY DROPS

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NED DAVIS RESEARCH GROUP Market Digest | JUNE 2015

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GLOBAL ECONOMY OUTLOOK

We continue to maintain our view that the global eco-nomic expansion remains intact, with developed economies leading the way, outperforming their emerging counter-parts.  Despite a slow start to the beginning of the year, we expect global economic growth to accelerate in the sec-ond-half of the year.  We anticipate that the U.S. economy will pick up after the weather-induced slowdown in Q1, while

trends in developed Europe and Japan have improved com-pared to last year.  But marked slowdowns in some emerging economies, namely Russia and Brazil, pose risks to the global outlook.  As a result, we expect the global economy to grow at a similar rate as last year, which was 3.4%, vs. our prior pro-jection of 3.6%.

Monthly Data 1/31/1998 - 5/31/2015

(IE250B)

5/31/2015 = 67.9%Share of PMIs Above 50

Shaded Areas Represent Contractions Based onPeaks and Troughs of OECD Reference Series

102030405060708090

100

102030405060708090

100

Share of PMIs Posting Positive Monthly Changes 5/31/2015 = 67.9%

102030405060708090

100

102030405060708090

100

Share of PMIs Posting Positive Year-to-Year Changes 5/31/2015 = 46.4%

Source: Haver Analytics0102030405060708090

100

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100

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Breadth of Manufacturing Purchasing Managers' Indexes (PMI)

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6-MONTH HIGH

9-MONTH HIGH

BEST SINCE 8/2013

TRENDS BROADENING

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Europe:  The eurozone economy began to flirt with reces-sion in 2H 2014.  But economic trends have been improving at a faster-than-expected rate in recent months.   Spain and Ireland are notable stars of the region.   The ECB's QE (chart below), the  weaker euro, lower oil prices compared to last year, and modestly improving lending environment should help support growth.  As a result, deflationary risks have sub-sided.  But geopolitical risks, such as the future of Greece, re-main threats.

Japan:  The economy fell into a technical recession  last year as the April 2014 sales tax hike wreaked even greater havoc on the economy than many had anticipated.  Real GDP rebounded in Q4 2014, but recent economic trends have been

tepid across most sectors.   Nonetheless, businesses remain profitable due to QQE, the weak yen, and lower oil.  Longer-term, we're skeptical about the success of Abenomics due to Japan's vastly aging population and lack of substantial struc-tural reforms.

China:    The current economic environment has slowed, as poor lending and real estate conditions weigh on growth.  Nonetheless, the government will likely achieve its growth goal for the year of around 7%, using broad and/or targeted stimulus when needed.   But don't expect a fiscal and mon-etary bazooka, as annual growth targets will likely be lower and lower in the coming years as the government focuses on quality over quantity of growth. 

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ECB Bank Lending Survey: Use of Additional Liquidity from Expanded APP: Overview 2015-04-22

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ECB Bank Lending Survey: Use of Additional Liquidity from Expanded APP: Overview 2015-04-22

Refinancing Granting Loans Purchasing Assets Refinancing Granting Loans Purchasing Assets

2.5

5.0

7.5

10.0

12.5

15.0

17.5

20.0

22.5

25.0

27.5

30.0

32.5

35.0

37.5

40.0

2.5

5.0

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10.0

12.5

15.0

17.5

20.0

22.5

25.0

27.5

30.0

32.5

35.0

37.5

40.0

Source: European Central BankLast Six MonthsNext Six Months

Increased liquidity from sales of marketable assets Increased liquidity from increased customers' deposits

TOP USE FOR QE IS LOANS!

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NED DAVIS RESEARCH GROUP Market Digest | JUNE 2015

www.ndr.com | Periodical | Issue #MKTDG2015061510

U.S. ECONOMY AND FIXED INCOME

Global – We are reducing our European exposure to un-derweight from a marketweight. We are increasing our U.S. exposure to a marketweight from underweight. We are over-weight the U.K. and Japan. We are in the latter stages of the Eu-ropean peripheral debt trade, with perhaps the last chance to buy this debt ahead of the final phase of spread compression.

U.S. – We remain 95% of benchmark duration. Treasurys are short-term oversold, but have not generated enough pessi-mism for an intermediate-term bottom. Five-year Treasurys are toward the upper end of our 1.25% to 1.85% trading range. Fair value on 10-year Treasurys ranges from 2.20% to 2.70%.

We are recommending a curve flattening trade, but are becoming more concerned. Our yield curve models are all in the neutral zone.

We remain overweight spread product, particularly credit. Within domestic taxables, we are overweight invest-ment grade and high yield corporates and CMBS, neutral on agencies, agency MBS, and ABS, and underweight Treasurys. Most munis are attractive for income-oriented investors in high tax brackets.

FED POLICY

We are leaning toward September for the start of rate normalization. More importantly, the path of future rate hikes will be slow and the slope flat. The shrinkage of the balance sheet will likely commence at least six months after the first rate hike.

Daily Data 6/04/2010 - 6/08/2015

(B496)

6/08/2015 = 189Treasury Note Yield minus Japanese Government Bond Yield

90

120

150

180

210

240

90

120

150

180

210

240

6/08/2015 = 151Treasury Note Yield minus German Bund Yield

0306090

120150180

0306090

120150180

6/08/2015 = 35Treasury Note Yield minus British Gilt Yield

-45-30-15

0153045

-45-30-15

0153045

6/08/2015 = 58Treasury Note Yield minus Canadian Government Bond Yield

Source: Bloomberg L.P.-30-15

01530456075

-30-15

01530456075

J S N J2011

M M J S N J2012

M M J S N J2013

M M J S N J2014

M M J S N J2015

M M

10-Year Government Bond Yield Spreads (In Basis Points)

Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved..www.ndr.com/vendorinfo/. For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at

U.S./GERMAN SPREAD CONTINUES TO CONTRACT

HIGHEST THIS YEAR

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NED DAVIS RESEARCH GROUP Market Digest | JUNE 2015

www.ndr.com | Periodical | Issue #MKTDG2015061511

v NED’S CORNER Ned Davis, Senior Investment Strategist

WHERE’S THE CASH?

There is a buyer and a seller on each trade – the cash from the buyer goes to the seller. So, my argument about not be-ing able to find much cash on the side-lines is a little bit of a pseudo-argument.

The real question is, who is the stronger partner in the trade? But I’ve always believed that the strongest force in the market was a “sold out” bull, and that is what I saw at the 2009 lows when money market assets were a whop-ping 46.9% of the value of the stock market. That created a lot of urgency when the clouds lifted and the market start-ed higher. Compare that to the 10.6% in money markets

currently, relative to the stock market. How much urgency to buy is there now? Just as importantly, this lack of cash has been telling for stock prices. Stocks have done over 10 times as well when this cash/assets ratio was high versus when it was low.

Many clients have questioned my use of money mar-ket assets for cash, as cash is found in many other places. But wherever I look, I get a similar picture. For example, I changed cash to income, comparing the value of stocks to disposable personal income. The chart below shows stocks very high relative to income, and that has not been very good for the stock market either.

HOT201506101A_C© Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

Standard & Poor's 500 Index Quarterly Data 1952-03-31 to 2015-03-31 (Log Scale)

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Standard & Poor's 500 Index Quarterly Data 1952-03-31 to 2015-03-31 (Log Scale)

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

253240506379

100126158200251316398501631794

1,0001,2591,5851,995

253240506379

100126158200251316398501631794

1,0001,2591,5851,995

Source: S&P Dow Jones Indices

S&P 500 IndexGain/Annum When

Household Equity as a% of DPI Is:

% Gain/Annum

% ofTime

* Above 110% 0.98 30.14

Between 86% and 110% 6.78 24.62

Below 86% 12.02 45.24

2015-03-31 = 2067.89

Household Equity Assets as a Percentage of Disposable Personal Income*

30

40

50

60

70

80

90

100

110

120

130

140

150

160

170

30

40

50

60

70

80

90

100

110

120

130

140

150

160

170

Source: Federal Reserve Board 2015-03-31 = 162.28%

Bearish

Bullish

*Excludes mutual fund assets

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NED DAVIS RESEARCH GROUP Market Digest | JUNE 2015

www.ndr.com | Periodical | Issue #MKTDG2015061512

Asset Allocation: Ned Davis Research, Inc.

constrains the recommended equity weight-

ing (which can theoretically range from zero

to 100%) to be limited to a minimum of

40% stocks and a maximum of 70% stocks.

Due to the constraint on equity weighting,

the combination of bonds and cash can be

weighted no greater than 60% and no less

than 30% in NDR’s recommendations. The

benchmark for bond allocation is 35% and

for cash is 10%.

Benchmark Duration: The most commonly

used measure of bond risk, quantifies the ef-

fect of changes in interest rates on the price

of a bond or bond portfolio. The longer the

duration, the more sensitive the bond or

portfolio should be to changes in interest

rates. Point of reference for a measurement.

Beta: A number describing the relation of an

investment return with that of the financial

market as a whole. Numbers greater than

one suggest an investment will increase

more than the broad market when it is ris-

ing, and have greater declines when the

market is falling.

Breadth: A technical term used to demon-

strate how broadly a market is moving.

Capital Market: Is a market for securities

(debt or equity), where business enterpris-

es (companies) and governments can raise

long-term funds.

Commercial Mortgage-Backed Securi-

ties (CMBS): A type of mortgage-backed

security backed by commercial mortgages

rather than residential mortgages. When

compared to a residential mortgage-backed

security, a CMBS provides a lower degree of

prepayment risk because commercial mort-

gages are most often set for a fixed term.

Core Inflation: Is a measure of inflation which

excludes certain items that face volatile price

movements, notably: food and energy.

Cyclical Bear: Cyclical swings in the mar-

ket can last from several months to a few

years, and are designed to be in line with

the primary trend. A cyclical bear market

is a cyclical swing when the market is in a

downtrend.

Cyclical Bull: Cyclical swings in the market

can last from several months to a few years,

and are designed to be in line with the pri-

mary trend. A cyclical bull market is a cycli-

cal swing when the market is in an uptrend.

Deflation: Is a slight decrease in the general

price level of goods and services. Deflation

occurs when the annual inflation rate falls

but stays above 0%.

Demographics: Studies of population

based on factors such as age, race, sex, eco-

nomic status, level of education, income

level, and employment.

Echo Bull/Bear: An echo bear market is a

shallower correction which occurs in the eq-

uity market that does not coincide with an

economic recession. An echo bull market is

one that follows and echo bear market.

European Central Bank (ECB): Is the insti-

tution of the European Union (EU) which

administers the monetary policy of the EU

Eurozone member states. It is thus one of

the world’s most important central banks.

The bank was established by the Treaty of

Amsterdam in 1998, and is headquartered in

Frankfurt, Germany.

Eurozone/European Union: Is an economic

and monetary union (EMU) of the European

Union (EU) member states which have ad-

opted the euro currency as their sole legal

tender. It currently consists of Austria, Bel-

gium, Cyprus, Finland, France, Germany,

Greece, Ireland, Italy, Luxembourg, Malta,

the Netherlands, Portugal, Slovakia, Slove-

nia, and Spain.

Federal Open Market Committee (FOMC:

A component of the Federal Reserve Sys-

tem, is charged under United States law

with overseeing the nation’s open market

operations. It is the Federal Reserve com-

mittee that makes key decisions about in-

terest rates and the growth of the United

States money supply.

Gross Domestic Product (GDP): The total

output of goods and services produced in a

given country during a given period.

Lagging Indicator: An economic factor

that changes after the economy has al-

ready begun to follow a particular pattern

or trend; used to confirm long-term trends.

Leading Indicator: An economic factor

that changes before the economy starts to

follow a particular pattern or trend; used to

predict changes in the economy.

Median P/E: Numeric value separating the

higher half of a sample, a population, or

a probability distribution, from the lower

half. This is the middle price-to-earnings

ratio of a series.

Mortgage-Backed Securities (MBS): A

type of asset-backed security that is secured

by a mortgage or collection of mortgages.

These securities must also be  grouped

in one of the top two ratings as determined

by an accredited credit rating agency.

MSCI Emerging Market Index: An index

developed by Morgan Stanley Capital Inter-

national, Inc. (MSCI) as an equity benchmark

for emerging market stock performance. It

is a capitalization-weighted index that aims

to capture 85% of publicly available total

market capitalization. Component compa-

nies are adjusted for available float.

GLOSSARY OF TERMS

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NED DAVIS RESEARCH GROUP Market Digest | JUNE 2015

www.ndr.com | Periodical | Issue #MKTDG2015061513

NDR Global Equity Allocation Model: The

model is dynamic, using panel regression to

rank six regional and country indices. The

weight of the evidence is assessed based

on external and internal factors, with 60%

of the weight on the externals (non-price-

based) and 40% on the internals (price-

based). A factor used for one index is also

used for the other five, with data unique to

that region or country.

NDR-Weighted Foreign Market Indexes:

These are capitalization-weighted indexes

constructed by Ned Davis Research, Inc. to

reflect the overall trend in a global market

sector or region.

Optimistic: A sentiment term, investors are

said to be optimistic if they think the market

will rise. We find that it is best to go with the

flow of sentiment until it reaches an extreme

and reverses, at which point we take a con-

trary position.

Overvaluation: A stock is said to be overval-

ued when its current price is not justified by its

earnings outlook or price/earnings (P/E) ratio

and, therefore, is expected to drop in price.

P/E: Is a measure of the price paid for a share

relative to the annual net income or profit

earned by the firm per share.

Personal Consumption Expenditures

(PCE): A  measure of price changes in con-

sumer goods and services.

Pessimistic: A sentiment term, investors are

said to be pessimistic if they think the mar-

ket will fall. We find that it is best to go with

the flow of sentiment until it reaches an ex-

treme and reverses, at which point we take a

contrary position.

Quantitative Easing: A government mon-

etary policy  occasionally used to increase

the money supply by buying government

securities or other securities from the

market. Quantitative easing increases the

money supply by flooding financial institu-

tions with capital in an effort to promote

increased lending and liquidity.

Relative Strength: Is the ratio of a stock

price to a market average.

S&P 500 Index Equally Weighted Geomet-

ric Index: An index constructed of the 500

stocks in the S&P 500 index on an equally

weighted geometric average basis (see geo-

metric average).

Secular Bear: Secular moves in the mar-

ket can last from several years to decades,

and are designed to call overriding trends

through several cyclical cycles. A secular

bear is a downward-trending secular move

in the market.

Secular Bull: Secular moves in the mar-

ket can last from several years to decades,

and are designed to call overriding trends

through several cyclical cycles. A secular

bull is an upward-trending secular move in

the market.

Sovereign Debt: Is money (or credit) owed

by a central government.

Spread Product: Favoring not only invest-

ment-grade corporate debt, but also asset-

backed and commercial mortgage-backed

securities, as well as senior secured loans,

sectors over Treasury securities.

Standard and Poor’s 500 Sectors: Stocks

in the S&P 500 index are classified into one

of 10 sectors/industries using the Standard

and Poor’s Global Index Classification Sys-

tem (GICS).

Standard and Poor’s 500 Stock Index: An

index of 500 stocks chosen for market size,

liquidity, and industry grouping, among

other factors. The S&P 500 is designed to

be a leading indicator of U.S. equities and is

meant to reflect the risk/return characteris-

tics of the large-cap universe.

Treasury Inflation-Protected Securities

(or TIPS): Are the inflation-indexed bonds

issued by the U.S. Treasury. The principal is

adjusted to the Consumer Price Index, the

commonly used measure of inflation. The

coupon rate is constant, but generates a dif-

ferent amount of interest when multiplied

by the inflation-adjusted principal, thus pro-

tecting the holder against inflation.

Value: A stock that tends to trade at a lower

price relative to its fundamentals (i.e., divi-

dends, earnings, sales, etc.) and thus consid-

ered undervalued.

VIX Index: A popular measure of the implied

volatility of S&P 500 index options. Often re-

ferred to as the fear index or the fear gauge,

it represents one measure of the market’s

expectation of stock market volatility over

the next 30-day period.

Volatility: A statistical measure of the dis-

persion of returns for a given security or

market index. Commonly, the higher the

volatility, the riskier the security.

Page 14: Ned Davis6.15

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NED DAVIS RESEARCH GROUP

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The data and analysis contained herein are provided “as is” and without warranty of any kind, either

expressed or implied. Ned Davis Research, Inc. (NDR), d.b.a. Ned Davis Research Group (NDRG), any NDRG

affi liates or employees, or any third-party data provider, shall not have any liability for any loss sustained

by anyone who has relied on the information contained in any NDRG publication. NDRG disclaims any

and all express or implied warranties, including, but not limited to, any warranties of merchantability,

suitability or fi tness for a particular purpose or use.

NDRG’s past recommendations and model results are not a guarantee of future results. This

communication refl ects our analysts’ opinions as of the date of this communication and will

not necessarily be updated as views or information change. All opinions expressed herein are

subject to change without notice. NDRG or its affi liated companies or their respective shareholders,

directors, offi cers and/or employees, may have long or short positions in the securities discussed

herein and may purchase or sell such securities without notice.

Using any graph, chart, formula or other device to assist in deciding which securities to trade or when to trade

them presents many diffi culties and their eff ectiveness has signifi cant limitations, including that prior patterns

may not repeat themselves continuously or on any particular occasion. In addition, market participants using

such devices can impact the market in a way that changes the eff ectiveness of such device.

Further distribution prohibited without prior permission. For data vendor disclaimers, refer to

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Copyright 2015 (c) Ned Davis Research, Inc. All rights reserved.

Tony Welch, CMTETF Strategist

Till Wieczorek, CFAQuantitative Analyst

Thomas Hansen, CFAMacro Analyst

Victor JessupU.S. Market Analyst

Anoop NathGlobal Analyst

John Lyon, CFASector Analyst

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