- The Dow Jones Industrial Average has dropped for four straight sessions.
- DJIA futures are down 0.35% again on Friday.
- Powell’s call for two more rate hikes this year has caused investors to reassess the market.
- Dow set a six-month high on June 16.
The Dow Jones Industrial Average (DJIA) looks set for a fifth session of losses on Friday as the Dow futures haved dropped 0.35% in the premarket. The Dow began pulling back last Friday after reaching a six-month high at 34,588 and has continued through this week as Fed Chair Jerome Powell testified on Capitol Hill that two more rate hikes were likely to be needed sometime later this year.
Dow Jones news: Powell’s hawkishness weighs on DJIA
Powell testified at both the House of Representatives and the US Senate on Wednesday and Thursday, respectively. Through questioning from a number of legislators over two sessions, the market has now begun to grasp that the Chair’s speech at the June 14 FOMC meeting might not have bee a lot of hot air.
Instead, the market is beginning to rebuff its prior skepticism that more rate hikes were likely and starting to believe that the Fed has more rate hikes to come. Powell was adamant that the Fed would most likely raise the fed funds rate twice in the second half of the year, while analysts up until now have for the most part being leaning toward a complete end to hikes or maybe just one more.
The Consumer Price Index (CPI) in May dropped from April’s 4.9% yearly read to 4%. With inflation appearing to move toward the Fed’s 2% mandate, the Fed decided to end its 10 consecutive rate hikes earlier in June, but Chair Powell confused the market by professing that two more hikes would come later in the year.
The threat of future hikes appears to be weighing much stronger on growth stocks in the NASDAQ, however, rather than the Dow’s blue chips. The NASDAQ 100 futures are nearly down twice the level of the Dow in Friday’s premarket at -0.64%.
Dow Jones FAQs
What is the Dow Jones?
The Dow Jones Industrial Average, one of the oldest stock market indices in the world, is compiled of the 30 most traded stocks in the US. The index is price-weighted rather than weighted by capitalization. It is calculated by summing the prices of the constituent stocks and dividing them by a factor, currently 0.152. The index was founded by Charles Dow, who also founded the Wall Street Journal. In later years it has been criticized for not being broadly representative enough because it only tracks 30 conglomerates, unlike broader indices such as the S&P 500.
What factors impact the Dow Jones Industrial Average?
Many different factors drive the Dow Jones Industrial Average (DJIA). The aggregate performance of the component companies revealed in quarterly company earnings reports is the main one. US and global macroeconomic data also contributes as it impacts on investor sentiment. The level of interest rates, set by the Federal Reserve (Fed), also influences the DJIA as it affects the cost of credit, on which many corporations are heavily reliant. Therefore, inflation can be a major driver as well as other metrics which impact the Fed decisions.
What is Dow Theory?
Dow Theory is a method for identifying the primary trend of the stock market developed by Charles Dow. A 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 a confirmatory criteria. The theory uses elements of peak and trough analysis. Dow’s theory posits three trend phases: accumulation, when smart money starts buying or selling; public participation, when the wider public joins in; and distribution, when the smart money exits.
How can I trade the DJIA?
There are a number of ways to trade the DJIA. One is to use ETFs which allow investors to trade the DJIA as a single security, rather than having to buy shares in all 30 constituent companies. A leading example is the SPDR Dow Jones Industrial Average ETF (DIA). DJIA futures contracts enable 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 enable investors to buy a share of a diversified portfolio of DJIA stocks thus providing exposure to the overall index.
Market Quote
Win Thin, head of securities strategy at Brown Brothers Harriman, said he does not believe the Fed Chair is bluffing and markets should expect this higher rate environment to last awhile.
“When all the dust settles, I think the Fed is going to go higher for longer. The market still doesn’t quite believe the Fed. They have one hike priced in, but the Fed has signaled there will be two. There are a lot of analysts who don’t think it will hike again. I wholeheartedly disagree.”
Dow Jones forecast
The Dow Jones index ricocheted lower off of the top of a resistance zone last Friday. Now it has broken through the bottom of that resistance region and blown through the 9-day moving average (blue). This signals that a sell-offf is in motion that is not likely to halt here.
If the index breaks below the 21-day moving average (purple), expect the DJIA to at least drop back to the 32,600 to 32,800 support range. That support zone held up price action in late May and early June. If it too fails, then the Dow will descend all the way back to March’s support range between 31,430 and 31,805. A fall to there would entail a 6% to 7% sell-off.
Any close above 34,600, however, and especially on the weekly chart, would put this rally back in motion. Despite the Moving Average Convergence Divergence (MACD) drifting above the zero threshold, the indicator looks likely to cross over bearishly in the next several sessions.
DJIA daily chart
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