U.S. Markets: A Fundamental and Technical View

The U.S. economy is one of the best on record.

U.S. GDP came in at a better-than-expected rate of 3.5% for the third quarter. 

The Bureau of Labor Statistics reported another 250,000 jobs in October 2018, which was way above forecasts for 190,000.

Consumer spending increased 0.8% in October 2018, exceeding the 0.5% estimate. Consumer sentiment remained strong in early November 2018, according to the University of Michigan report, as well.

And, a survey of consumer expectations by the Federal Reserve Bank of New York found that household income growth and spending expectations are increasing.

In addition, the U.S. Commerce Department estimates GDP grew 3.5% in the third quarter, which follows the rapid 4.2% growth in the second quarter. And the International Monetary Fund estimates that U.S. growth at 2.9%, which is faster than most other countries.

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But as great as this all sounds, it came at a heavy cost.

A strong U.S. economy was also responsible for bringing the market down. 

In fact, it’s so strong the Federal Reserve is aggressively raising short-term interest rates, and reducing its balance sheet. As the Federal Reserve raises rates, it’s attracting foreign investors, which has also driven the U.S. dollar to recent highs. That’s also a problem because a stronger dollar can weaken commodity prices, which are priced in US dollars.

In fact, a stronger dollar has already crushed commodities like oil, which fell 20% recently. 

At the same time, a stronger dollar can cut into the profits of multi-national companies that are all over the Dow Jones and S&P 500 indexes. 

However, even with all of the fear and panic on the Street, it could be greatly overdone.

After an incredible pullback, the Dow Jones for example now sits at strong support, which has held since February 2018.  As long as it doesn’t break below this “line in the sand,” we could see a significant turn higher on the Dow. 

In addition, the Dow Jones is just now beginning to bounce from its lower Bollinger Band (2,20). It’s also far too oversold on relative strength (RSI), MACD and Williams’ %R.

From here, we wouldn’t be surprised to see the Dow Jones challenge double top resistance around 27,000. Keep an eye on it. The pullback could be overdone.

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