Dow Jones Industrial Average (.DJI) Additional Volatility, More Abrupt Moves

Dow Jones Industrial Average (.DJI) Additional Volatility, More Abrupt Moves

Dow Jones Industrial Average (.DJI) Additional Volatility, More Abrupt Moves

There’s lots for investors to love. Except the abrupt and often scary pullbacks that have erupted repeatedly over the last 18 months. These have resulted in declines of 20% or so in the fourth quarter of 2018 and roughly 7% just this past May.

Between the 2016 election and the end of 2017, the U.S. major indices saw just one down month. But, since January 2018, the S&P and NASDAQ have had six down months, the Dow, five.

As a result, the S&P 500’s year-to-date gain at the end of June was lower than where the benchmark stood at the end of April. It’s also possible there will be more volatilityahead, though not on Monday.

Currently, financial markets are being ruled largely by forces that have fueled quick moves up or down, including:

  1. Trade tensions between the United States and China.
  2. Uneasiness in the Middle East that nearly had the United States attacking Iranian military facilities.
  3. Worries about North Korea and its nuclear weapons capabilities.
  4. Computerized trading programs that make algorithmic buy-and-sell decisions.

July will begin with the first three issues on hold, providing the catalysts for Monday’s expected rally.

  • The United States and China have agreed to continue trade dispute negotiations. Tariffs will be held at current levels and U.S. technology companies can sell products to Huawei, the Chinese telecommunications giant.
  • The United States didn’t attack Iran, in part because President Donald Trump wants to get U.S. military forces out of the Middle East.
  • Worries about North Korea were diffused Sunday when Trump and Kim Jong-un met for 45 minutes at the Demilitarized Zone that separates North and South Korea. They agreed to restart talks on reducing North Korea’s nuclear arsenal.

Unexpected Results; Some Deep-Seated Issues

Still, any surface calm is belied by some unexpected results that could point to more deep-seated issues:

  • Most of the gains occurred during the first quarter as stocks bounced back from last fall’s big slump. Second quarter gains were far more moderate.
  • Utility stocks were consistent winners. The Dow Jones Utility Average gained 13.7% in the second quarter because falling interest rates made their stable and lucrative dividends attractive. During the S&P 500’s 6.6% swoon in May, the Dow utilities fell just 0.7%; the index hit five new highs between May 24 and Wednesday.
  • McDonald’s also hit new highs. The stock (NYSE:MCD) gained 17% in the first half. The latest move higher came on Friday when it reached nearly $208, just pennies off its 52-week high.
  • Apple may be up 25% on the yearbut that’s after the stock (NASDAQ:AAPL) fell 30% in the fourth quarter of 2018. And it’s still more than 15% below its 52-week high reached last fall.
  • Microsoft was the Dow leader in the first half. The software giant (NASDAQ:MSFT)—once derided as a has-been compared with Apple or Amazon (NASDAQ:AMZN)—was the second-best performer in Q2, after Disney (NYSE:DIS), whose shares took off when it announced the launch of its streaming service next fall.
  • Microsoft is the only stock with a market capitalization above $1 trillion, but it may be vulnerable. Its trailing 12-month P/E ratio is nearly 30. (Amazon’s trailing P/E ratio is 70, but investors have never really cared.)

Landscape Looks Favorable, But…

So what’s ahead? That depends. First, on whether the events that create short, sharp swoons (tariff threats, military threats, nuclear threats) are minimized. Traders and their algorithms hate uncertainty.

The current situation is mostly favorable for stocks. Interest rates are lower. The 10-year Treasury finished the quarter at 2.0%, down 25% this year because of worries the global economy is slowing. The U.S. economy is growing at about 3% a year, to the impatience of the Trump Administration, but a recession doesn’t seem likely.

The domestic unemployment rate, 3.6% in May, has fallen 64% since a 10% peak in October 2009. Initial jobless claims have fallen by two thirds since their March 2009 peak.

Big companies are continuing to buy back their stock, which spreads earnings across fewer shares, helping to support prices. Admittedly, first-quarter repurchases of $205.8 billion were down 7.7% from the fourth quarter, but they were up 8.9% from a year earlier, according to S&P Dow-Jones Indices. Apple alone has bought $23.1 billion in shares during Q1.

However, arrayed against those factors are some potential headwinds:

  • U.S. manufacturing is slowing, suggesting the U.S.-China trade dispute is a big issue.
  • Traditional retail is struggling against e-tail competition. Nordstrom (NYSE:JWN) is the S&P 500’s biggest loser this year, down 30.5%. Macy’s (NYSE:M) and Kohl’s (NYSE:KSS) fell 28%.
  • The agricultural economy is struggling because it depends so much on export markets. Soybean prices are up 3% this year but down a third from the end of 2012.

Overall, the bias in prices is: Upwards.

By the way, prices are vulnerable to a correction towards 26,105.52.

The projected upper bound is: 27,310.93.

The projected lower bound is: 26,130.25.

The projected closing price is: 26,720.59.

Candlesticks

A black body occurred (because prices closed lower than they opened).
During the past 10 bars, there have been 4 white candles and 6 black candles for a net of 2 black candles. During the past 50 bars, there have been 27 white candles and 23 black candles for a net of 4 white candles.

Momentum Indicators

Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.

Stochastic Oscillator

One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 37.0695. This is not an overbought or oversold reading. The last signal was a buy 0 period(s) ago.

Relative Strength Index (RSI)

The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 66.04. This is not a topping or bottoming area. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a buy 19 period(s) ago.

Commodity Channel Index (CCI)

The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is 81. This is not a topping or bottoming area. The last signal was a sell 4 period(s) ago.

MACD

The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a buy 17 period(s) ago.

Rex Takasugi – TD Profile

DJ INDU AVERG closed up 117.469 at 26,717.430. Volume was 2% below average (neutral) and Bollinger Bands were 28% wider than normal.

Open High Low Close Volume___
26,805.85926,890.64126,616.21126,717.430 285,350,208

Technical Outlook
Short Term: Neutral
Intermediate Term: Bullish
Long Term: Bullish

Moving Averages: 10-period     50-period     200-period
Close: 26,609.84 26,044.44 25,466.19
Volatility: 10 15 20
Volume: 309,867,968 285,104,192 321,902,720

Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.

Summary

DJ INDU AVERG is currently 4.9% above its 200-period moving average and is in an upward trend. Volatility is extremely low when compared to the average volatility over the last 10 periods. There is a good possibility that there will be an increase in volatility along with sharp price fluctuations in the near future. Our volume indicators reflect moderate flows of volume into .DJI (mildly bullish). Our trend forecasting oscillators are currently bullish on .DJI and have had this outlook for the last 13 periods.

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