- The Dow Jones Industrial Average has gained for five of the past six sessions.
- The DJI is sitting below a major resistance band.
- On Thursday, higher Initial Jobless Claims resulted in the market expecting a rate pause at the Fed’s June 14 meeting.
- The S&P 500 ended its 18-month bear market on Thursday.
The Dow Jones Industrial Average (DJI) gained for the fifth time in the last six sessions on Thursday as the larger S&P 500 index broke out of its longest bear market since 1948. Both indices benefited, counterintuitively, from higher Initial Jobless Claims that presented the market with more ammunition for a rate pause by the Federal Reserve (Fed).
In the premarket, Dow futures have declined 0.14% early Friday as NASDAQ 100 futures are just barely green. The DJI advanced 0.5% on Thursday.
Dow Jones Index News: Higher jobless claims show Fed is getting results
The US Department of Labor released Initial Jobless Claims on Thursday that showed an increase of 28,000 layoffs in the week ending June 2. The 261K in unemployment claims was well above expectations for 235K and led the market to presume that the Fed would have an easier time pausing its rate hike cycle at the June 14 meeting.
That news came one week after the US Bureau of Labor Statistics reported that the Unemployment Rate in May rose from 3.4% to 3.7%. Additionally, recent data from both the ISM Manufacturing and Services PMIs show an economy that is slowing down somewhat. This is only good news if you are laser-focused on the Fed reaching its terminal rate sooner rather than later. Much of the institutional investing class is in that category.
The CME Group FedWatch Tool predicts interest rate changes based on price action in the 30-day fed funds futures market. Currently, the tool gives a 78% chance that interest rates remain flat at 5% to 5.25% and a 22% chance that the Fed hikes by 25 basis points at the June 14 meeting. Lower or stabilized interest rates should help corporations in need of financing and aid bank lending, which has receded of late due to the higher rate environment causing a reduction in deposits.
S&P 500 ends long bear market
The S&P 500 ended its 18-month long bear market, the longest since 1948, on Thursday. The S&P 500 index closed at 4,293, just a little over one point above the point level that equates to a 20% gain from its low on October 13, 2022.
From its high on January 4, 2022, the S&P 500 index fell roughly 27% until its low on October 13. Advancing 20% off a low traditionally ends a bear market, although to be sure S&P Dow Jones Indices (which manages both the DJI and the S&P 500) does not consider a bear market to be over until a new high is achieved. That criterion would require the S&P 500 index to climb another 12% from here. Most of the market follows the traditional criteria though.
For its part, the Dow Jones Industrial Average has already broken its bear market. This happened just two months after its October 13 low on November 30. In that session the Dow ran up 2.18% to close at 34,589 – well above the 34,393 level needed.
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.
Dow Jones forecast
Since then, however, the DJI has been in a bit of a funk. On December 13, 2022, the DJI index ran to a 11-month high at 34,712 but then sold off to end the session at a loss. For the past six months, DJI has been floating in a holding pattern primarily between 31,600 and 34,000.
A range of resistance between 34,257 and 34,590 has been pushing rallies down for months at this point. Closing above that 34,590 level, therefore, should result in the beginning of a new rally for the Dow Jones index. This is why 34,600 is the first major price level to break and a primary price target for bulls. The Moving Average Convergence Divergence (MACD) indicator has crossed over bullishly of late, so a rally up to this target should be in the cards.
If not and more support is required, the 32,500 to 32,800 demand zone should come in handy in the case of any major downdrafts. That range has worked as support on a number of occasions all year long.
DJI daily chart