Indices Analysis – Dow Jones Industrial Average.
There is a theory around the Dow Jones Industrial Average that market technical analysts all over the world subscribe to. It is known as Dow Theory, in which the theory states that an upward trend is when higher highs are created in the Dow Jones Transportation Average (DJTA) proceeding higher highs in the Dow Jones Industrial Average (DJIA) or vice versa.
Mapping the two indices together shows clearly that the relationship between the Industrial Complex and the Transportation Complex is very close, as logic would suggest. While we still require having input materials to create manufacturing and shipping of goods occurs, Industrial companies will need some sort of transportation to move the materials and goods.
Just before the coronavirus left Wuhan, China, and made its way around the world to become the most disruptive thing since World War 2, the DJIA made higher swing highs but the DJTA did not. Then as both indices took out their most recent swing lows, there was a clear signal that a substantial correction was occurring and the topping in the markets. No one knew how bad the decline would be, but in hindsight, the signal of an important divergence plus the obvious sentiment change on the growing bad news, was clear to see and it came earlier than the S&P500 and Nasdaq could warn us, as these indices were making higher highs still.
Over a year since the start of the COVID-19 pandemic started we now have the major indices all at new all-time highs. The DJIA continues to push on towards the next big figure level of 40,000.
This latest round of earnings has been very good for the majority of the DJIA constituents as it has been for the larger S&P500 index. For Q1 2021 (with 60% of the companies in the S&P 500 reporting actual results), 86% of S&P 500 companies have reported a positive EPS surprise and 78% of S&P 500 companies have reported a positive revenue surprise.
DJIA top 10 constituents by index weighting: Taking a sample of the top 5 weighted constituent parts to the DJIA gives a trader an idea of how much room there is to the upside in the near to medium term.
UnitedHealth Group’s first-quarter 2021 revenues of $70.2 billion grew $5.8 billion or 9.0% year-over-year, and looking at the momentum on the daily chart it is easy to see that this share is in a major uptrend technically, with growing revenues, so no reason to doubt it will turn should the covid-19 troubles be passing.
Goldman Sachs saw net revenues of $17.7 billion in Q1 of 2021. Additionally, the investment bank reported earnings per share (EPS) of $18.60, which significantly beat the market’s estimates. The daily 50 ema and 200 ema are clearly diverging still showing that with new higher high price action there is still momentum driving this chart higher.
Home Depot, Inc is expected to report earnings in mid-May with forecasts that EPS for the quarter is $2.91. The reported EPS for the same quarter last year was $2.08 and recently the expectations have been exceeded. The workers returning back to the office may have done all of their DIY’ing during the lockdown, but there is still a massive demand for new houses, as people move out of the cities into the suburbs and less densely populated areas. So The Home Depot is likely to benefit from this for some time.
Microsoft’s financial results reported revenue of $41.7 billion and a net income of $15.5 billion. Revenue is up 19%, and net income has increased by 44%. The stay-at-home stocks have started to turn but as the daily chart shows, there is a clearly defined support from a previous balance area, for the price to get through and the moving averages still signal momentum to the upside.
Boeing is still fighting through the disruptions caused by the pandemic and has reported a net loss of $561 million for the first three months of 2021 on revenue of $15.2 billion, 10% lower than last year but slightly ahead of analysts’ estimates. Before the pandemic, there was trouble with their 737 Max airplanes, but they recently got the go-ahead to fly again.
The moving averages crossed at the end of 2020 and since last summer the price action has been making higher highs and higher swing lows, but this company is still suffering and could be until there is clear evidence of global openings and a return to tourism.
Dow Theory would suggest that the indices are strong and rising, but this could all be undone if there was a policy change from the US Treasury or the Federal Reserve.
Yesterday US Treasury Secretary Yellen talked about the need for raising interest rates to cool the overheating economy. Something that several years ago she may have had the mandate to talk about, but now it was a clear case of stepping on her protégés toes. Made all the worse by President Biden seemingly agreeing with Treasury Secretary Yellen. The markets were clearly spooked and showed how fragile these uptrends are.
However, this does present good trading opportunities. Until there is a fundamental change in policy, there will be headline traders attempting to sell the highs. Traders are almost desperate to say they sold the top of the markets, but as we have learnt from the previous run-up from 2008, the frustration of traders and investors as markets grind higher is their downfall.
There has been a massive amount of fiscal stimulus pumped into the system, to help bridge the gap between those that could not go to work and for new ways to protect jobs. There is also more stimulus coming down the pipe which will benefit the industrial, manufacturing, and job markets. As President Biden is keeping to the Make America Great Again mantra but with slight wording changes. He would prefer the infrastructure bill to protect and enhance American industry and jobs, so keeping these new dollars within the borders of America.
On the H4 chart using a trend indicator like the Ichimoku cloud is a great filter for being long or short. When the price is above the cloud, the momentum is in our favour to go long. The DJIA is also very good at technically breaking out of a range and then retesting that range, before simply continuing in the original direction. Making it perfect for traders with discipline and a simple horizontal line on the charts to trade-off.
Keeping an eye on the weekly and daily charts and where the price is relative to the last breakout area, and swings should give an investor plenty of warning of a material change in trend. Also, keeping an eye on the DJIA v’s DJTA to see if there is a falloff in one or the other in terms of continually mirroring each other’s higher swing highs and higher swing lows, will again aide an investor in when to possibly trim their position. But ultimately the target is 40K on the DJIA or a reversal on policy change, whichever comes first.