DOW JONES The Buy/Sell correlation with Unemployment & Inflation

This is a simple yet extremely informative analysis of the Dow Jones (DJI) index on how its multi-year correlation with the Unemployment Rate (black trend-line) and the Inflation Rate (grey trend-line) provide the ultimate Entry/ Exit signals on the long-term. The blue trend-line is Dow's 1M MA50 and the green is the 1M MA100.

As you see, with the sample starting in 1987, every time the Unemployment is Low while Inflation is high, the stock market peaks and starts declining. Similarly, when the Unemployment is high while Inflation is low, the stock market bottoms out and starts recovering. Notably, this correlation even stood right during the 2020 COVID crash where the shift happened extremely fast, with unemployment being low + inflation high just before the crash and right after the unemployment spiked (following the lockdowns) while inflation hit a 5 year bottom and started rising after the stimulus started kicking in.

That led to the 2022 stock market correction on massive inflation but with unemployment (still) near pre-COVID lows. According to the model that was a Sell Signal on stocks and we see how it was accurate yet again.

The key now is the 1M MA50 (blue trend-line). During the previous three corrections (COVID 2020, Mortgage Crisis 2008, DotCom Crisis 2001), the market broke below the 1M MA50. The exception was the October 1987 crash (Black Monday), where the sharp crash reached exactly the 1M MA50 and rebounded. In the three corrections that did break below it though, the index always reached the 1M MA100 (green trend-line). So a solid long-term sell signal from now on would be if the price breaks the 1M MA50 with a target on the 1M MA100. If by that time inflation bottoms out and starts reversing while the unemployment rate is much higher, we can start considering buying stocks again on a multi-year horizon.



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