Zerononcense Blog

Dow Jones Fundamental Analysis (Part I): General Overview Edition

This is a rare crossover to stocks, but this feels like an appropriate one to make since there has been so much volatility in the markets as of recent.

In this price analysis, we’re going to go ahead and take a look at some of the fundamental drivers for the increased volatility of the U.S. markets (by analyzing the Dow Jones specifically), as well as the technical indicators that have signaled off as of late.

For those that do not know, the reason why this is relevant to crypto is because there is a clear and defined relationship between Bitcoin (specifically) and the U.S. markets.

Link: Bitcoin is Intuitively Tied to the Stock Market 

So, let’s begin with a fundamental overview of the U.S. stock market using the Dow Jones as our benchmark.

Fundamental Overview of the Stock Market

If we head back to the months of July — September 2018, we can observe the Dow Jones posting fairly remarkable gains throughout:

https://www.tradingview.com/x/3cNLhpfp/

Using TradingView’s charts, we can see a gain of approximately 10% during the month.

Immediately following this substantive gain in the price, we can see a steep decline from October moving forward to the date of publication (December 26th, 2018):

https://www.tradingview.com/x/cpaeB2oS/

Reasons for the Decline in Recent Months

#1 — Anxiety about the China-U.S. Relationship

While this story has served as the underlying narrative for U.S. market movements throughout 2018, it appears that fears began to heighten around October.

It was during this period that numerous media outlets began reporting that there appeared to be a stalemate between President Trump’s administration and that of General Secretary Xi Jinping.

Articles such as this one from CNBC served the role of what many in the crypto community would more than likely deem as ‘FUD’:

Even optimists are giving up hope of a quick resolution to the US-China trade war

Haibin Zhu, chief China economist at J.P. Morgan, said the bank’s baseline scenario is for the U.S. to impose tariffs on all Chinese imports. That means “real painful economic events in 2019,” he said at a conference last week in Hong Kong.

Articles like this one did not help either:

Trade war moves to new battlefronts as US turns up heat on China

A lull in the trade dispute amid heightening anti-China rhetoric suggests a shift in strategy, as the Trump administration weighs economic and military sanctions

#2 — Anxieties About the Federal Reserve

Another underlying story to the U.S. markets has been how the Federal Reserve would react to the U.S. economy and markets.

For those that do not know, the Federal Reserve in the U.S. is responsible for the country’s fiscal and monetary policy. In terms of relevance, the Federal Reserve’s quarterly adjustment of the national interest rate is what usually dictates the extent of market anxieties.

Throughout the year, there has been a general pessimism surrounding the Fed’s decision (and impending ones) regarding the interest rate.

The general logic is this:

The Federal Reserve continuing to hike rates (which they have done continuously), will inevitably result in a downturn in borrowing (which its supposed to), which will take more money out of the economy, which will in turn lead to an accelerated run toward a bear market/economic recession.

What this logic results in:

Since this way of thinking is so prevalent among institutional investors in the U.S. markets, many have been offloading assets during each hike in order to preemptively avoid what they feel is an impending market crash/implosion.

This line of reasoning is reflected in numerous articles throughout 2018:

Federal Reserve prepares for next crisis, bets it will begin like…

BOSTON (Reuters) – The Federal Reserve painted a picture of the U.S. economy that was almost too good to be true at its last meeting, with inflation seen contained in the near future despite the lowest unemployment rate in 20 years.

#3 — End of Quantitative Easing (QE)

For those that do not know, during the Economic Crisis of ‘08/’09, the Federal Reserve decided to engage in a new, experimental recovery practice of purchasing assets on the market for the sake of buoying its price.

This definition by Investopedia below should also help investors in understanding the process of ‘Quantitative Easing’:

Source: https://www.investopedia.com/terms/q/quantitative-easing.asp

However, in 2017, that all came to an end:

US Federal Reserve calls historic end to quantitative easing

The Federal Reserve will throw its crisis-era stimulus programme into reverse from next month and stick with plans for further rate rises in a mark of confidence that stagnant inflation is set to bounce back. The US central bank, chaired by Janet Yellen, held interest rates on Wednesday but said it would consider a further rate rise this year.

Thus, many investors are worried that the sell off from the assets purchased during Quantitative Easing in conjunction with the hike in nationwide interest rates could potentially exacerbate the underlying conditions/symptoms of an impending bear market.

#4 — Increasing Treasury Yield Curves

Increasing short-term treasury yield curves are never a good thing for the economy.

Below, is a chart depicting the increasing treasury yield curves (pay close attention to the 2-year, 3-year, and 5-year) over the last few weeks.

Source: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/TextView.aspx?data=yieldYear&year=2018

Above, is a picture depicting the treasury yield rates in January/February 2018 (approx. 11–12 months ago).

Source: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/TextView.aspx?data=yieldYear&year=2018

Above, is yet another image depicting the treasury yield rates throughout December and November 2018.

As you can see, there is a remarkable difference in the values depicted in the two pictures. This is worthy of note.

#5 — President Trump’s Tweets and Statements

This is perhaps the most controversial addition to the list, but it still deserves mention regardless.

Many have stated openly that President Trump’s statements on social media and elsewhere have precipitated substantive declines in the market.

Given the fact that this is not necessarily a quantifiable metric or even one with specific precedent, it is hard to say whether this is a definitive fact. However, one must acknowledge that the mere perception that this is a fact dictates the reality of market movements.

Therefore, this is not something that can be counted out.

Conclusion of Part I

This concludes part I of our analysis on why the stock market has declined so precipitously throughout 2018. In the next part, we’ll take an in-depth look at the stock charts to see if we can ascertain exactly why the stock market has been hit so hard in recent months (there is a substantial amount of technical analysis that should/must be done to understand this topic!).

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