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New Year’s Day always leads me to want to pull out the old crystal ball and try to make a stock market prediction for 2018. To make this exercise simple, and understandable for most readers, I decided to focus on what the Dow Jones Industrial Index could do in 2018.
After all, when the general population thinks about the US stock markets, they often refer to the Dow index.
Stock Market Prediction for the Dow
Right now, the Dow is very overbought on the RSI-9 graph of the monthly chart which is of concern to me. Of course, when a market is trending, the RSI can remain overbought for a very long time. RSI tells us that the overbought market is due for a correction, but it can’t really tell us WHEN that will happen.
The MACD histo bars (9,20,7) have leveled off somewhat from the spring of 2017. However, they remain steadfastly in positive territory. So there are no sell signals yet. Again, I refer to the monthly chart for this observation.
Consider the long period of expansion (endless rallies) since the last serious corrective base. The last deep base (a 20% bearish correction or more) was in the period of 2008 to 2012. So, since 2012, the Dow has been on a steady course higher. Five straight years with only minor pullbacks! To simply make a stock market prediction of more of the same would seem the easy way to forecast events in the new year. After all, trend is a powerful force in the stock market, as we have seen time and time again.
One thing in favor of the Bulls is that the last corrective base ( in 2008-2012) was a base re-set since the low of the base was lower than the previous large base (from the dot-com era). Those base re-sets can sometimes mean that the next corrective base won’t be so bad. This remains to be seen, of course, but I thought I would mention it. Another thing to consider is that the current bull market is nearly the longest in US history.
A Hawkish Fed in 2018
The US stock market has been supported by easy money policies at the Federal Reserve for several years. Now, the FED will be going through some serious quantitative tightening in 2018 with the sales of bonds held by the FED. The Fed is also expected to continue hiking interest rates. So we will have a double whammy from the FED in 2018! Can the economy withstand this double hit?
Perhaps the new tax reform which takes effect today could continue to drive the US economy forward, despite the hawkish Fed? We shall see.
There is also a great amount of political uncertainty both at home and abroad. Instability in Washington is just as worrisome to some investors as is the unrest overseas. The feud between Democrats and Republicans and even within the parties is about as bad as I can remember. Then toss in the issues we might face with North Korea or in the Middle East, and the stock market could get quite shaken up at some point.
Stock Market Prediction Timetable
My own prediction is that the Dow will take a serious hit sometime in 2018. I think the period of spring and summer might be most vulnerable for various reasons. The Dow might re-cover some by late this year once the frothiness has been removed from the market. Yet overall, I expect the Dow to finish lower by around 15% compared to the 24,719 mark as of the last day of 2017.
So, my prediction is the Dow will finish at around 20,500 to 21,000 but we could see a mid-year dip that takes the Dow as low as the top of the brief early 2016 correction which was at around 18,300 or so.
January Often Sets the Tone
I wouldn’t be surprised to see the month of January set the stage for a rougher year. I expect greater volatility and some profit-taking in the early part of the new year. Take a look at the chart down at the bottom of this blog. The Dow is about as high above the 50 day line (percentage-wise) as we have seen in a long time. The daily RSI is extended into a very long period of being overbought (above 70).
It’s often said that January sets the tone for the US markets. So if we get a rough start in January, that could lead to the negative results I expect for the year overall.
Of course, predictions a year out are not easy to make. I looked at some of my 2017 predictions in the category marked 2017 Predictions by Members on the Talking Stocks Forum . I can see I was off quite a bit on most predictions. 2017 turned out to be quite a bullish year, and quite unexpected in some ways, and with very little volatility.
I have a hard time believing that we can have two years straight of low volatility! So, I am betting on a more volatile market in 2018 and lower finish by year end.
Anyone else care to make a prediction? Please click on the reply button to make your own comments.