Home Forex The DJIA breaks below a significant moving average as the downtrend gains evidence

The DJIA breaks below a significant moving average as the downtrend gains evidence

by SuperiorInvest


  • U.S. Treasury yields are rising again as bets on a rate cut ease.
  • US retail sales data for December was very hot.
  • The Dow Jones industrial average closed below its 21-day simple moving average on Tuesday for the first time since Nov. 1.
  • JPMorgan, UnitedHealth and Goldman Sachs report earnings on Friday, Travelers reports.

The Dow Jones Industrial Average (DJIA) traded lower for the third session in a row on Wednesday. The DJIA lost 0.25% on Wednesday, outperforming the S&P 500 and NASDAQ Composite at 0.56% and 0.59%, respectively.

US retail sales for December beat consensus early on Wednesday, which, coupled with recent statements by the Fed’s hawkish governor, suggested the Federal Reserve’s (Fed) rate cuts may take longer than expected.

Dow investors have already digested three fourth-quarter results from its constituents and are looking forward to Friday’s earnings announcement from Travelers (TRV).

Dow Jones News: Markets cut bets on March and May rate cuts

The U.S. Census Bureau reported that U.S. retail sales rose 0.6% month-on-month in December. Consensus was calling for a 0.4% increase, and November’s figure was 0.3%.

This reading was too hot for investors who openly sold off the stock. It was another example of the market seeing positive economic news as bad for stock prices. That’s because investors believe that positive economic numbers make it less likely that the Fed will start cutting interest rates rates in the market schedule.

Ahead of the release, the market was heavily betting on cuts at both the March and May Federal Open Market Committee (FOMC) meetings. But after U.S. retail sales, the likelihood that central banks will hold rates constant at 5.25% to 5.50% at the March meeting rose from 35% to 43%, according to data from CME Group’s FedWatch Tool. Likewise, the probability that Fed funds will move 50 basis points below current levels (4.75% to 5.00%) at the May FOMC meeting fell from 59% to 15%.

Tuesday Comments by Fed Governor Christopher Waller didn’t help the sentiment either. Waller said there was no need for the central bank to cut rates at a hasty pace and should instead take a wait-and-see approach. The comments were in line with December’s Dot Plot, which called for a 75bp cut in 2024. The market rallied in December on market consensus for a 150bp cut and now that optimism is coming to a head.

The fact that fewer rate cuts are now factored into equity market models for this year means that US Treasuries are being sold off, pushing yields higher. Wednesday witnessed the second day in a row that yields rose more than 2%. The yield on the 2-year bond even rose by 3% at one point in the session. Of course, rising returns often travel in the opposite direction of stock prices, and that’s the case here.

The Dow cannot benefit from the recent gains of the index’s constituents

The Dow Jones Index has only 30 stocks, so any earnings call from a component usually has an outsized effect. The start of this earnings season was overshadowed by the general focus on interest rates, but three major index holdings reported fourth-quarter results.

JPMorgan ( JPM ) opened last Friday with adjusted earnings per share (EPS) of $3.97, up from $3.57 a year ago and beating consensus expectations of $3.61. Revenue of $38.6 billion missed consensus by more than $1.2 billion. Overall, revenue was up nearly 12% from a year earlier, and the community banking division was praised for most of those gains.

UnitedHealth Group ( UNH ), which makes up about 10% of the Dow and remains its largest holding, also reported fourth-quarter results last Friday. The insurer said healthcare costs rose more than expected in the quarter, but was still able to beat consensus for EPS and revenue by a small margin. Revenue rose 14% year-over-year and the company reaffirmed its outlook for 2024.

Goldman Sachs ( GS ), which makes up about 7% of the Dow Jones, absolutely blew away consensus estimates for the fourth quarter when it reported results on Tuesday. GAAP EPS of $5.48 beat analysts’ estimates by $1.55 and revenue consensus was topped by $360 million. Management praised its wealth management unit for better-than-expected performance.

Analysts aren’t as optimistic about Travelers, the smaller Dow component that reports on Friday. All 19 analysts who changed their Q4 estimates cut their earnings outlook. The commercial and property insurer is expected to post adjusted earnings of $5.06 on revenue of $9.95 billion.

Dow Jones FAQ

The Dow Jones Industrial Average, one of the oldest stock indexes in the world, is made up of the 30 most traded stocks in the US. The index is weighted by price rather than capitalization. It is calculated by adding the prices of individual stocks and dividing them by a factor that is currently 0.152. The index was founded by Charles Dow, who also founded the Wall Street Journal. In later years, it was criticized for not being representative enough, tracking only 30 conglomerates, unlike broader indexes such as the S&P 500.

The Dow Jones Industrial Average (DJIA) is driven by many different factors. The main one is the aggregated performance of individual companies published in the companies’ quarterly earnings reports. US and global macroeconomic data also contribute as they impact investor sentiment. The level of interest rates set by the Federal Reserve System (Fed) also affects the DJIA because it affects the cost of borrowing, on which many companies are heavily dependent. Therefore, inflation can be a major driver, as well as other metrics that influence the Fed’s decisions.

Dow Theory is a method for identifying the primary trend of the stock market developed by Charles Dow. The key step is to compare the direction of the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) and only follow trends where both are moving in the same direction. Volume is the confirming criterion. The theory uses elements of peak and minimum analysis. Dow theory assumes three phases of a trend: accumulation, when the smart money starts buying or selling; public participation when the wider public joins in; and distribution when the smart money leaves.

There are several ways to trade the DJIA. One is the use of ETFs, which allow investors to trade the DJIA as a single security, rather than having to buy shares of all 30 companies that make it up. A prime example is the SPDR Dow Jones Industrial Average ETF (DIA). DJIA futures contracts allow traders to speculate on the future value of the index, and options provide the right, but not the obligation, to buy or sell the index at a predetermined price in the future. Mutual funds allow investors to buy a share of a diversified portfolio of DJIA stocks, thereby providing exposure to the overall index.

Dow Jones Industrial Average Forecast

The Dow Jones Industrial Average fell below its 21-day simple moving average (SMA) on Tuesday, and the index continued to do so on Wednesday. The DJIA price action has closed above the 21-day SMA in every session since November 1st, so this is a big deal and likely signals a bearish reversal is in motion. It also looks like a downswing is in motion for the DJIA as a lower low was made in closing on Wednesday compared to the January 8 low.

The DJIA may find support in the former resistance zone of 36,500 to 36,952 dating back to late 2021. However, a break of 36,500 would trigger another sell-off that would likely reach another zone of former resistance in the mid-35,000s.

Dow Jones Industrial Average Daily Chart

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