Lately, it’s been hard to find a safety zone in the markets. Most key classes are down for the YTD, 4-week and 2-week periods. Only commodities, oil in particular, have been bright spots.

The following charts use these ETFs as proxies for key asset classes:

• VTI - US stock market
• EFA - non-US developed stock markets
• EEM - non-US emerging stock markets
• VNQ - US equity REITs
• DJP - global commodities*
• USO - oil alone
• AGG - US aggregate bond market

* DJP represents the DJ-AIG Commodity Index which is a “balanced” index. It limits any one of the 19 commodities it follows to a 15% weight, and any of the 5 commodity groups to a 33% weight. Since oil has been the overwhelming performer lately, DJP underweights oil in comparison to its world significance. The S&P GSCI Commodity index represents its commodities on a world production basis. For a more detailed discussion of commodity index composition and performance differences, see our article on that topic.

YTD chart:

REITs were slightly positive for the YTD period after an encouraging period in March and April, but they have since faded.

4-week (20-day) chart:

2 week (10-day) Chart:

Richard Shaw
QVM Group LLC

The bond markets are in a continued state of panic. Central bankers are making historic and unprecedented moves. Hedge funds and investment banks have failed. Bank stocks are way down. The stock market is schizophrenic – up 400 day and down 350 the next.

March 19 (WSJ) – Demand for Treasurys High … Credit-quality fears dominated fixed-income trade Wednesday, with government paper still in very short supply in the $4.5 trillion securities repurchase market and failed deals picking up. … Demand for Treasury bills has been rampant …

March 19 (Bloomberg) — Treasuries rose and three-month bill rates plunged to the lowest level in almost 50 years on speculation credit market losses will widen, prompting investors to seek the relative safety of government debt.

… The odds policy makers will cut the target lending rate by a half-percentage point at their April 30 meeting was 82 percent, according to futures on the Chicago Board of Trade. The rest of the bets are for a quarter-point reduction.

March 19 (WSJ) — Stocks and commodities plummeted on Wednesday as the euphoria that carried equity markets to massive gains a day earlier gave way to nervousness that the broader U.S. economy hasn’t yet escaped the dangers of the credit crisis.

Richard Shaw
QVM Group LLC

We think fundamental analysis is more useful than technical analysis, but we do take technical factors into consideration.

One of the problems facing technical analysts is that of time frame. By expanding or contracting the time window, opposite conclusions can be reached.

Longer time frames are better for establishing major trends, while shorter time frames are better for establishing minor trends.

When the minor trend is in the same direction as the major trend, there may be more reason to be confident of a continuation. When the minor trend is in the opposite direction of the major trend, there may be more reason to expect a reversal.

Look at these two charts for the emerging markets ETF, symbol EEM.

The short-term, six month chart shows lower highs and lower lows. That is a classic sign of a downward trend.

The long-term, five-year chart shows higher highs and higher lows. That is a classic sign of an upward trend.

If you are a long-term investor, you may be encouraged by the signals from the five-year chart. If you are a short-term investor, you may be discouraged by the signals from the short-term chart.

This is not meant to be a tutorial on technical analysis, but rather a cautionary statement about technical charts and technical comments by others that may influence you in your investment decisions.

One reason that technical analysis may work, at least sometimes, is that it can become a self fulfilling prophecy. If “everybody” expects something to happen, because “it is written in the charts”, it may very well come to pass. Eventually though, we believe that fundamentals will prevail.

The great fundamental investor Benjamin Graham made the famous statement “In the short run, the market is a voting machine, but in the long run it is a weighing machine.”

A reasonable translation of that quote might be, “In the short run the market is driven by technical factors, but in the long run it is driven by fundamental factors.”

If you are going to rely on technical signals, become reasonably familiar with the types of technical tools available, what they’re supposed to tell you, and how popular they are among current investors. Then make sure that you look at multiple time frames so as not to miss the forest for the trees. Finally, for all but short-term traders, fundamentals eventually trump the technicals.

Richard Shaw
QVM Group LLC