Be Careful Going Into 2019

With the start of a new year, some of these market studies are going to look at the stock market in 2018 and see what that implies for 2019.

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Let’s determine the stock market’s most probable medium term direction by objectively quantifying technical analysis. For reference, here’s the random probability of the U.S. stock market going up on any given day.

*Probability ≠ certainty. Past performance ≠ future performance. But if you don’t use the past as a guide, you are walking blindly into the future.

The rising U.S. Dollar vs. stocks

Contrary to popular belief, a rising U.S. Dollar isn’t consistently bearish for stocks.

  1. Sometimes stocks go up when the USD rises
  2. Sometimes stocks go sideways when the USD rises
  3. Sometimes stocks go down when the USD rises.

However, when stocks do fall while the USD goes up, stocks tend to fall more in the future. This is similar to our interest rates study.

Here’s what happens next to the S&P 500 when the S&P falls during a calendar year while the U.S. Dollar Index goes up.

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You can see the stock market’s bearish tendency over the next 2 months.

What the U.S. Dollar does

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Another volatile day

It was another volatile day for the stock market. The S&P gapped down more than -1.5%, but managed to close higher than the previous day’s CLOSE.

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From 1900 – present, such a large gap down and then an intraday reversal has only happened 3 other times.

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With n = 3, I wouldn’t read too much into this.

XLY:XLP

The XLY:XLP ratio (consumer discretionary vs. consumer staples) tends to move in the same direction as the U.S. stock market. But when this ratio moves in a different direction from the S&P 500, it’s a long term warning sign.

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