Dow Analysis: DJIA Nears 18-Month Highs After Benign CPI Data

DJIA Takeaways

• The DJIA has been outperforming the previously high-flying Nasdaq 100 for the last three weeks, marking a potential turning point in the growth vs. value trade.
• Benign CPI data and the uptick in initial unemployment claims reduces the odds of another Fed rate hike next month.
• The Dow is holding near 18-month highs, and a break above 35,700 resistance could pave the way for a continuation toward 36K or even the record highs at 37K.

DJIA Fundamental Analysis

With the vast majority of earnings season behind us, it’s clear that large publicly-traded corporations were able to capitalize on Q2’s economic backdrop by more than expected. According to the earnings mavens at FactSet, nearly 80% of the companies in the S&P 500 beat earnings estimates, and roughly two-thirds beat analysts’ revenue estimates.

At the same time, investors have been rotating slightly away from the fast-growing-but-highly-valued technology and communications stocks that have driven much of this year’s rally in favor of so-called “value” stocks. At an index level, this shift has benefited the Dow Jones Industrial Average (DJIA) at the expense of the previously high-flying Nasdaq 100 (NDX), with the former rising roughly 3% from July 19^th, while the former has fallen by more than 3% over the same period.

Whether this brief period of value over growth outperformance continues remains to be seen, but after such a long period of strength in growth stocks, readers should at least be monitoring this potential turning point.

Dow Technical Analysis – DJIA Daily Chart

Source: TradingView, StoneX

Turning our attention to the daily chart, we can see that DJIA had a strong rally to nearly 35,600 on the back of this morning’s slightly-softer-than-expected CPI reading and the uptick in initial unemployment claims, two data points that reduce the odds of another interest rate hike from the Federal Reserve. However, as we go to press, the index is pulling back from its intraday highs to trade back into the 35,300s.

Taking a step back, the index remains in a clear uptrend, with prices holding near their 18-month highs and all the major moving averages trending higher. As long as this week’s low near 35,000 holds, the short-term path of least resistance will remain to the topside, with a break above 35,700 signaling another leg up toward 36,000 or even the record highs near 37,000 next. Meanwhile, a break below this week’s lows could expose the 50-day EMA and previous-resistance-turned-support in the mid 34,000s.

-- Written by Matt Weller, Global Head of Research

Follow Matt on Twitter: @MWellerFX