Market Snapshot: What's Thriving in Battered Economy

The economy has had more than its share of trouble lately: Japan's earthquake comes on top of rising oil and food prices, political turmoil in the Middle East and a crop of government austerity measures. Here's what's thriving in the battered economy.The tragic earthquake that devastated northeast Japan also has struck the global economy. And the natural disaster comes after several other blows that have hit the economy lately. Rising prices for food and oil, turmoil in the Middle East and belt-tightening by deficit-hampered governments all have weakened the prospects for strong growth.

Amid all the unsteadiness, investors are looking for ways to protect their portfolios against rising risks and potential losses. Some sectors and investments might be well placed to hold their own -- or even gain -- in the current atmosphere of uncertainty and heightened risk.

And as the global economy has grown, investment opportunities have expanded. New exchange-traded funds (ETFs) have popped up for popular investment categories, such as precious metals and emerging markets.

It's impossible to review all of the hundreds of investing options in the global marketplace, so I'm aiming to get a snapshot of the market by reviewing six charts that cover a spectrum of options: the tech-dominated NASDAQ; emerging markets, as covered by the EEM ETF; gold, via the GLD ETF; the energy sector, through the XLE ETF; bonds, via the TLT Treasury bond fund; and currency, with the U.S. dollar index (DXY).

Diversity Reduces Risk

My reasoning for this selection is based on a simple investing principle for lowering risk: choosing a variety of investments that are inversely correlated -- meaning they act as a seesaw: when one is up, the other is down, and vice versa -- or weakly correlated, meaning they move up and down independently of each other.

Markets that move in lockstep don't really offer any meaningful diversity or hedging. Owning a portfolio of sectors and markets that move together is equivalent to putting all your eggs in one basket. So the key to hedging your bets is picking investments that behave differently in different scenarios.

For example, the dollar and U.S. bonds have a strong inverse correlation with equities -- meaning that when stocks decline, bonds and the dollar tend to strengthen -- so I've included them as potential hedges against stock-market weakness. Oil prices have risen sharply, so I've included an ETF for the energy sector.

And as the U.S. economy has worked its way through the recession, many investors also have turned to emerging markets and precious metals in the hope of higher returns, which is why I've also included exchange-traded funds for those sectors.

To screen out the noise of daily trading, I've selected long-term weekly charts.

The NASDAQ



The tech-heavy NASDAQ has been on a tear, along with the S&P 500 and the Dow Jones Industrial Average, but there are signs that the uptrend is running out of steam: indicators have rolled over and the price is testing the 20-week moving average. A decisive break below this line could lead to a test of the 50-week moving average around 2,450. Broadly speaking, this area offers resistance and support going back to pre-recession 2008, and should be watched carefully.

Emerging Markets



Emerging markets have remained flat since the middle of January, trading in a narrowing band which has traced out a pennant or wedge, a pattern which technicians view as evidence of indecision. This lack of direction is also visible in the tightening Bollinger bands, a move that reflects decreasing volatility.

Wedges and narrowing Bollinger bands typically lead to major moves either up or down, and an accompanying increase in volatility.

There are troubling signs of weakness here: The price has fallen below the 20-week moving average, which now acts as resistance, and the trend indicators have turned down. An open gap at 42 beckons, signaling that the price could dip down to fill that gap.

There's not much bullish evidence here, and plenty to signal caution.

Gold



Precious metals -- including gold, silver and platinum -- have all registered strong gains. This run had led some observers to discern a speculative bubble in gold and silver. A glance at this chart finds little evidence for speculative extremes. Instead, it shows firm and steady growth, even though the price dips down to test the trendline from time to time.

The moving average convergence divergence (MACD), an indicator used to calculate buy and sell signals, remains bullish as well. Gold could suddenly reverse and crash -- that's always a risk in any open market -- but there is precious little technical evidence that such a crash is imminent.

Bonds



As might be expected when stocks swoon, Treasury bonds -- here represented by the TLT bond fund -- have gained. Both the MACD and the lower Bollinger band in this chart have turned up, signaling a trend reversal from a previous decline. Prices have reached the 20-week moving average, and a breach above this line would help confirm that an uptrend is taking hold.

In the past few years, when equities slide, bonds have outperformed. Conversely, when stock have roared ahead, bonds have slipped. Is that historical correlation holds true, bonds may be expected to strengthen if stocks fall into a pronounced downtrend.

The U.S. Dollar




Like bonds, the dollar acts as a so-called "flight to safety" or "safe haven" when stocks swoon. The dollar has risen sharply in stock downturns, topping out when the stock market bottoms. Prices have fallen to support -- meaning they seem to have bottomed out -- around 76, potentially tracing out a bullish double-bottom pattern.

The psychology of a double bottom is common sense: If the price holds at previous lows, investors believe that "the bottom is in" and the coast for gains is now clear.

A Stochastics reading, which compares the current price to historical prices, indicates that the dollar has been deeply oversold and suggests that investor sentiment has reached its lowest point. That bearish climax means that a reversal is likely, as the market rarely rewards the majority for holding the same position as everyone else.

Once again, stocks and the dollar are on a seesaw: If stocks slip, the dollar tends to rise in value.

Oil and Other Energy



The XLE energy ETF's chart clearly displays the extraordinary run that oil has experienced in the past seven months. The indicators have turned down, mirroring the recent weakness in price, which is testing the trendline. Despite this recent decline, prices remain well above the moving averages, which means that energy is still in an uptrend.

No market advances in a straight line forever, so some pullback would be natural. Is this the first step in a major trend reversal, or merely a pause that refreshes the oil bulls? That is impossible to say just yet. Some significant level of support, such as the 20-week moving average, would have to be broken to truly call the uptrend into question. It would not be surprising for price to dip down and test this support, as those who have profited handsomely from this bull run pocket some gains.

But any market that has climbed this far this fast bears close monitoring.

No market is immune to risk and uncertainty, of course. Markets that look strong can suddenly reverse, while those that look sickly can suddenly rebound. Still, a watchful analysis of trends and market correlations can offer investors some clues about risk and potential returns in these uncertain times.

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americandoo

"TIME FOR BIG INVESTORS TO STEP UP TO THE PLATE LEAD AMERICA BY
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the torch in one hand and our GREEN PLANET EARTH in her other hand, her head
raised high looking Up at the sky.

This would make a GREAT FILM based
on a True Story with the help of A TEAM OF BIG MONEY INVESTORS ! ! !

Use your Imaginatio­n think how; GREAT THIS WOULD BE FOR AMERICA & OUR
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"DREAM BIG...DO BIG"

Thank You, Respectful­ly, Michael V. Caldwell

August 05 2011 at 12:34 PM Report abuse rate up rate down Reply
Dereck

Major Fraud Alert


The entire Federal Banking System under FirstGov has been "Consumed" and "Levied" by way of a Maryland State Circuit/District Court Ruled “Appropriation and Garnishment” of all Future Earnings prior to and after 2004 against Bank Of America by way of the F.D.I.C. Regulations Prohibiting failing Banks from Merging with other failing Banks between the Dates of 08/04/08 and 10/09/09.

Bank of America violated the 21st Century Act: Final Amendments to Regulation CC Section: http://www.federalreserve.gov/boarddocs/press/bcreg/2004/20040726/attachment.pdf

seeking reimbursement of Credit, Loan, and Finance Balances as a "Bank Entity" and not a "Nonbank Consumer" as specified on Pages 85 and 86.

The person they sued through a LLC. Debt Collection Company and Law Firm was the "World Fortune Owner" who "Counterclaimed" and won.

Now all Contracts of any Corporations (Including Employment) under the "Controlling Interest" of any Investment Bank Worldwide are "Null and Void", and are also under the stipulated Rules and Regulations of an "Closely-held S Corporation rendering all Employed under Legal Actions against “Domination”, and also means that "No Corporation can hold Shares" officially making every Stock Exchange on the Planet a "Ponzi Scheme" by default.

Businesses owned by the States (Public Corporations) are being sold Stock Shares by Corporations also under the Federal Banking System in this Worldwide "Ponzi Scheme". The World Fortune Company Merrick Inc. Sweden is dissolving Millions and Billions of Dollars from "All Levels of Government"in the U.S. of Financing based upon Years of "negligent inaction" involving this case.

The Federal Government has already been forced to discontinue supplying the Financing States use to pay their debts, Persons in Government Offices may want to begin to take their jobs more seriously, these are different times from 10 Years ago and you will not be accepted civil servants here just because you say you are here to do the right thing.

May 29 2011 at 12:36 AM Report abuse rate up rate down Reply
lanashapiro

moronic assessment

March 16 2011 at 4:33 AM Report abuse -1 rate up rate down Reply
vlady1000

Silver may be the play. Look at the historical sivler to gold price ratio. Either gold is way too high or silver is way too low or both. I think a little of both. I in now (1st time in decades). ...Remember when the Hunt Brothers tried to corner the silver market about 30 years ago? Those that bought in then (and still have it) may finally have a chance to break even.

March 15 2011 at 11:09 PM Report abuse rate up rate down Reply
Franco

The ignorance of the supposedly highly educated bewilders me. What part of "broke" do these literate dunce capped saltine crackers want me NOT to believe? Flat tax everything and cut everything even untill a balanced budget will be achieved.

March 15 2011 at 9:48 PM Report abuse rate up rate down Reply
1 reply to Franco's comment
jdrumerrnr

Must not be broke if we can still tax.

March 15 2011 at 11:47 PM Report abuse rate up rate down Reply
andshd

PUT UP THE DOW JONES CHART. PLS.

March 15 2011 at 8:58 PM Report abuse rate up rate down Reply
marine1942

What is hot ?? PING GOLF. Did you see the drive off the 4 th tee by Obama yesterday ??

March 15 2011 at 7:30 PM Report abuse rate up rate down Reply
1 reply to marine1942's comment
Franco

Yup, I'm a fan of golf too. I hit two of my best balls in 2008 in Wingfoot gols Club, when I stepped on a rake.

March 15 2011 at 9:53 PM Report abuse rate up rate down Reply
licwinko

Tuesday, March 15, 2011 Email to a Friend ShareThis.Advertisement
The Rasmussen Reports daily Presidential Tracking Poll for Tuesday shows that 20% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-two percent (42%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -22. That is the president’s lowest rating since September

March 15 2011 at 6:09 PM Report abuse +7 rate up rate down Reply
eestravantes

I am a big fan of CHS. He is a student of economics, as I am. As a student of stock market analysis, I would like to point out that both the U.S. Dollar and bonds seem to be range bound rather than following sustainable trends. This supports any premise of counter-trend strength. Fundementals still hold for currencies, so charts and technical analysis are of little value. In other words, maybe we get a dead-cat bounce here-and-there in an ongoing bear market. Being merely a techinical indicator, stochastics should only be viewed as a warning. Note how often stochastics flatline overbought or oversold.

March 15 2011 at 4:42 PM Report abuse -2 rate up rate down Reply
1 reply to eestravantes's comment
Franco

Oh yeah?

March 15 2011 at 9:33 PM Report abuse rate up rate down Reply
tj1108

Whats driving the battered economy. Whatever the fed is proping up with QE2. It changes day by day.

March 15 2011 at 4:26 PM Report abuse +4 rate up rate down Reply