Which Way is the Dow Jones Industrial Average Trending?

By SiliconIndia   |   Tuesday, June 13, 2017
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The Dow Jones Industrial Average has been a bulwark of strength on Wall Street. As the world’s preeminent index, the Dow represents the broad performance of the biggest companies in the United States. However, on Friday, 9 June 2017, a major selloff of tech stocks racked the index, reversing the current trend of strong gains. Nonetheless, the Dow Jones ended the day with 23 members up and just 7 members down. The 30-member index is currently trading at 21,271.97, up 0.42%, or 89.44 points.

Recall that the Dow breached the critical 20,000 resistance level, and continues to trade in record territory. The best performing stocks on the day included Pfizer Inc., JPMorgan Chase & Company, Chevron Corporation, Merck &Company Inc., Exxon Mobil Corporation, and Goldman Sachs. As expected, the worst performers on the Dow included the major tech stocks in Visa Inc., Intel Corporation, Microsoft Corporation, and Apple Incorporated.

A risk-off approach to tech stocks dominated the final trading day of the week. But good news is in store for the banking and financial sector in the US economy. On Wednesday, 14 June, the Fed FOMC is slated to decide on interest rates. Currently, the 12-member board of the FOMC is widely expected to hike rates by 25-basis points to 1.00% – 1.25%.

Strong Relationships Between the Monetary, Fiscal Policy and Key Sectors

The impact of a Fed rate hike on the USD is clear: a positive relationship. International traders will be short-selling foreign currencies and purchasing the USD in anticipation of the rate hikes. Given that the Fed is targeting an interest rate in the region of 3% – 4% by 2019, multiple additional rate hikes are expected to follow. Currently, the probability of a rate hike in June is 99% +, meaning that this is already a foregone conclusion.

Dollar-denominated commodities like gold are particularly sensitive to Fed rate hikes. Although, much of what happens with commodities like gold, crude oil, silver, platinum, copper and iron ore is dependent upon the perspective that the Fed has of the US economy. If the FOMC meeting minutes indicate a bullish stance on US economic growth, this could drive dollar demand and cause a rally on the Dow Jones, NASDAQ composite index, S&P 500 index and the New York Stock Exchange.

As Trump Trade began to fade – through the quagmire of Congress – financials began to take a pounding. There are growing concerns that the White House may not be able to push through its ambitious plans on tax reform, immigration and border security, deregulation and healthcare – thereby shifting the focus of investors elsewhere. The recent volume of global index trading activity has not diminished – it has merely shifted from tech-heavy indices like the NASDAQ to the Dow and the S&P 500.

No Reason for Panic Just yet

The 2.4% decline in the performance of the NASDAQ recently is concerning. It speaks volumes of a potential tech bubble that exists in equities markets in the US. We are seeing positive movements for financials over the short-term, and this bodes well for call options on key bank stocks like JPM, BAC, C, and GS. The recent performance of bank and financial stocks marks the best run of form for 2017. Analysts have made mention of a rotation taking place in financial markets where traders and investors are shorting the large market cap companies, and going long on small market cap companies and forgotten stocks.

These are otherwise known as value stocks, and there is significant upside potential available with them. Right now, the price/earnings ratio of tech stocks to that of the broader market is far less pronounced than it was in 1999/2000 at the height of the dotcom bubble. Given that valuations are not overly pronounced in the tech sector, there is a semblance of normalcy in the pricing of US indices right now.

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