E Looking AT 2019 With A Top-Down Approach

Today, I’d like to take a look at some things that will likely influence markets in 2019 and into 2020. I like to start the year with the top-down approach to figure out where were are in the broader economic picture. This approach helps me narrow down my investment theme for the year. I still see the potential for the stock market to base and extend into 2020, but for that to occur, a few things need to go right.

  • The Democratic House needs to work with Trump and back away from trying to indite him. Some pundits believe the Democrats are willing to sacrifice the economy if it gets Trump out of office.
  • There needs to be significant progress in the trade war with China. It will likely get worse before it gets better, but I believe we will reach a deal.
  • The Federal Reserve needs to slow down and pause entirely. 
    It looks like the Fed is preparing to slow down. However, they are still on pace to reduce their balance sheet by 50-billion a month. That is a form of tightening and will affect markets negatively. Investors will be watching to see if the Fed pauses their balance sheet reductions.

If any of the above conditions blows up, we will likely see more downside in the stock market. If the Fed refuses to yield, they will push the economy into recession. Gold will remain buoyant as long as economic uncertainty endures. However, if the above conditions are met, the economy will stagger forward, and gold will begin to lose its appeal.

GOLD WEEKLY 

This chart dates back to the 1970’s. I found two examples of multi-year bases similar to now (labeled A and B). Box A failed to break out and eventually sank to new lows. Box B broke decisively higher and inaugurated a multi-year uptrend. We are currently in box C. To confirm an upside breakout gold needs to close progressively above $1420 and on good volume. Failing to break out above $1380 – $1420 in 2019 could lead to more consolidation and lower prices. A weekly close below $1167 would imply a bearish breakdown.

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