Is the American economy reaching the ceiling?

Surely this is a question that many of you asked yourself at least once during this chaotic year. 2019 is coming to the end and it is a key milestone in investors’ psychology. A cycle is ending and a new one is starting, mindset can turn to another direction and what was positive yesterday can become negative tomorrow.

The main battle that brought uncertainty and anxiety to the investors is the unconcluded Trade War with China, but it was not the only concern, we had Korea, Mexico, and the Brexit on the table. A very complex scenario at the time to make investment decisions.

The Dow Jones is by excellence the reflection of the American economy, and the correlation of this index is extremely high with the counterparts S&P and Nasdaq. Its movements are the consequence of mass investors’ decisions with multiple variables influencing the 3 possible paths to follow, buy, sell or stay out.

The monetary policy adopted by the FED since the crash of 2009 with “quantitative easing” and “repurchase agreements” as main cards, allowed the climb during the last decade with increasing debt issuance and outstanding. To understand better this scenario we recommend you read “A weak Dollar and artificial growth”

During the last year, the Dow Jones moved in a range, driven by all the variables already mentioned. When we deep-dive on the movements and behavior during the last 5 years we can discover, as if it were a seismograph, the chaos, and confusion in the investors’ mass.

DJIA & Sequences Length

The panic is at the same level as the 2009 crash, and even, it is extending more in time, something could generate extreme tiredness in the investors. The stress is there but the benefits are not being worthy. The regular reaction after facing a stressful situation like this is to move out to a comfort zone until the energy is back to face the stressful circumstances again.

The speed or the distance/time traveled by the index is reaching the amplitude of 2009 and reflecting more chaos than before. This fact gives more support to the above exposed.

DJIA & Speed

The Hurst exponent, measuring memory impact is random for the time series since 2009 and it is showing a break in the curve for the last 5 years. This could be anticipating the exhaustion of the long term cycle and the close beginning of a corrective phase.

Change in the slope to negative in the Log R/S
DJIA completed sequences and potential iterations

The completed sequences and the future iterations in the fractal are showing the probability of new highs coming at the weekly range, as the last Xmas gift to close a very atypical year, but in the monthly range  the long term sequences are calling out exhaustion, and our AI, staying out by now as the best option.

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