There is certainty and then there is Friday. The Dow Jones Industrial Average (DJIA) set a modern all-time high, up about a quarter of a percent, on a day that had little reason to celebrate. A famously hawkish modern boss took the gavel at the Federal Reserve (Fed), consumer sentiment fell off a cliff, households said they expected more inflation, not less, and a ceasefire in the Middle East remained unresolved. None of this mattered. The tape wanted the record and accepted it.
The hawkish transfer of power was ignored by the bulls
The main event of the day should have stopped the rally. Kevin Warsh took the oath of office as the modern Fed chairman, a man with a hawkish track record who has declared his intention to shrink the central bank’s bloated balance sheet and plans to reform the way the Fed runs markets. This is a structural headwind to risky assets, not valuing basic money stocks that have been priced for two years. The tape was recorded anyway.
Tempers flare, but the offer doesn’t
Friday’s study from the University of Michigan (UoM) was ugly in a way that should make you uncomfortable. Both sentiment and expectations fell sharply, well below consensus, while one-year and five-year inflation expectations rose, both exceeding forecasts. It’s a stagflation cocktail in miniature, consisting of less confidence and more stiff prices, which landed just as Fed Governor Christopher Waller adopted a distinctly hawkish tone. Soft data is basic to dismiss in one day, but the study and the hawk combined take nerve.
Peace bonus based on rumors
Then there is Iran. Word is circulating that a U.S.-Iran deal is imminent, perhaps imminent, and risky assets have quietly confirmed some of that optimism. The problem is that the same story has been going on for weeks. The US president himself called the ceasefire in early April barely feasible, Tehran’s latest proposal was rejected, and there is still fire trading near the Strait of Hormuz, with the price of oil above $100. Rumors of a breakthrough continue to emerge from anonymous sources, but no document has been produced, and some doubt whether the project even exists. Relying on a peace dividend that may never come is relying on hope.
Price increases, not reductions
This is where the stock market and the rate market part of the company completely. Futures actually see no chance of moving at the June meeting, a continuation is almost certain and from there the curve drifts in the wrong direction for the bulls. Until October, the enhance is priced as more likely than being maintained, and by December, the market puts over 70% chance that rates will remain higher than currently, with the probability of a cut at zero. For the last two meetings, the Fed has maintained its benchmark at 3.50-3.75%. April’s Consumer Price Index (CPI) hit a high of nearly 4% y/y, and the bond market has quietly decided that the next move, if any, will be up.
Even the president has softened, admitting he will let his modern chair do as he sees fit, which from a man who demanded cuts for two years sounds like a tacit admission that they won’t come. The record levels are expected to reflect a market that expects policy easing. The curve shows that tightening monetary policy is associated with greater risk, and only one of these stories can be true.
Settlement takes place on Thursday
None of this will be seriously tested until mid-week. US markets are closed on Monday for the holiday, reducing liquidity over the long weekend and making low-volume melts basic to produce and complex to trust. Thursday brings the April Consumer Expenditures Price Index (PCE), the Fed’s preferred measure of inflation and a top-notch release. With inflation expectations already rising on a unit basis and CPI remaining flat, the balmy PCE print will only reinforce the hawkish path the interest rate market is already pricing in, making record high stocks look more and more like this odd one. The supple version buys the bulls another week of denials.
Replacing the record for the long weekend
For now, the trend is upwards. The breakout zone near the record high around 50,800 is the line that matters, and staying above it keeps momentum hunters engaged. Below that, the first level is around 50,200, Friday’s low, and below the round 50,000 level is the low that the bulls cannot afford. An straightforward read is a momentum tape based on tender conviction and less fluency during the holiday season. Going forceful for a long time is fine as long as 50,000 holds, but it’s not a marriageable level. If Thursday’s inflation print is balmy or the Iran talks fall apart, the record’s recovery will be much faster than the grind that caused it.
Dow Jones 5-minute chart
Dow Jones FAQs
The Dow Jones Industrial Average, one of the oldest stock indexes in the world, consists of the 30 stocks most frequently traded in the United States. The index is price-weighted, not capitalization-weighted. It is calculated by summing the prices of the company’s shares and dividing them by the coefficient, 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 because it only tracks 30 conglomerates, as opposed to broader indexes such as the S&P 500.
Many different factors influence the Dow Jones Industrial Average (DJIA). The most crucial are the total results of the companies included in the group, disclosed in quarterly reports on the companies’ results. Macroeconomic data from the United States and around the world also matters because it influences investor sentiment. The level of interest rates set by the Federal Reserve (Fed) also affects the DJIA because it influences the cost of borrowing, on which many corporations depend heavily. Therefore, inflation may be the main driver, as well as other indicators that influence Fed decisions.
Dow Theory is a method of identifying the main trend in 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 track trends where both are heading in the same direction. Volume is a confirmatory criterion. The theory uses elements of peak and trough analysis. Dow Theory assumes three phases of a trend: accumulation, when clever money starts buying or selling; public participation when wider society is involved; and distribution when the clever money comes out.
There are many ways to trade the DJIA. One is the operate of ETFs, which allow investors to trade the DJIA as a single security rather than buying shares of all 30 companies that comprise it. A leading example is the SPDR Dow Jones Industrial Average ETF (DIA). DJIA futures contracts allow investors to speculate on the future value of the index, and Options give the right, but not the obligation, to buy or sell the index at a predetermined price in the future. Mutual funds allow investors to purchase a portion of a diversified portfolio of DJIA stocks, thereby providing exposure to the entire index.
