Dow Jones Industrial Average Forecast: DJIA declines on Israel-Gaza hostilities, ignores strong Q3 results
- A hospital in Gaza that exploded overnight has led to worse recriminations across the Middle East.
- A flight to Treasuries is keeping yields lower but also drawing interest away from the equity market.
- Dow Jones Industrial Average rises almost 1% in first two sessions this week.
- US Retail Sales for September showed the US economy still growing at a healthy pace.
- Dow components so far are producing quite decent results so far during the Q3 earnings season.
The Dow Jones Industrial Average (DJIA) fell about one-third of a percentage point at the market open on Wednesday as tensions erupted in the Middle East following an explosion at a Gaza hospital that has killed hundreds of Palestinians. Several Arab leaders canceled plans to meet with US President Joe Biden in the aftermath of the blast, which triggered a wave of anti-US and anti-Israel protests across the region.
This newfound risk-off moment has sent US Treasuries higher, yields lower and a marginal exodus from the stock market. Oil has also surged over 2% on the back of these tensions. The S&P 500 and NASDAQ Composite both traded down in excess of the Dow on Wednesday morning.
A number of high-profile Dow components have already released third-quarter earnings this week, which should be supporting the price action if it wasn’t for the geopolitical tension in the air.
Dow Jones News: Hospital blast increases possibility of wider conflict for Israel
Late Tuesday, something ignited an explosion at the Al-Ahli al-Arabi hospital in Gaza. Eyewitnesses say between 300 and 500 civilians were killed in the event. Most Gazans appear to believe that an Israeli bomb was the cause, while the Israeli military says a misfired rocket from Islamic Jihad ignited munitions stored at the hospital.
Either way, President Biden sided with Israel’s version of events as he met with Israeli Prime Minister Benjamin Netanyahu in Israel. Large demonstrations have since launched in a number of other Middle Eastern countries, including Turkey. Worse, a diplomatic solution may have been bungled as the Palestinian Authority, Jordan and Egypt canceled a scheduled meeting with Biden to be held later in the week.
A flight to safety has made US Treasuries more popular, and yields are moving lower en masse for the first time in a while. Yields have fallen the most near the middle of the curve with the 2-year, 5-year and 10-year bonds. Falling Treasury yields are typically good for stock prices, but in this case it appears that investors are selling stocks to buy Treasuries.
The sentiment at the start of the week was that the hostilities were confined to Israel and the Gaza Strip, which allowed equity markets to make gains. Following the hospital blast, however, the consensus is that the conflict could become a wider phenomenon in the Middle East. As a result, Oil prices shot up more than 2% in the premarket trade.
Dow stocks are doing quite well so far in Q3 earnings season
On Tuesday, September Retail Sales for the US came in at 0.7%, more than double the expected reading of 0.3%. This positive news showed that the economy is still in good shape but raises the chance that the Federal Reserve may have more trouble keeping inflation in check.
Dow stock JPMorgan (JPM) kicked off earnings week last Friday with a near 9% beat on the bottom line, and revenue just under $40 billion beat consensus by about $472 million. The stock has a weighting of about 2.6% of the index.
Johnson & Johnson (JNJ) reported adjusted earnings per share (EPS) of $2.66 on Tuesday, which beat consensus by 14 cents. Revenue also bested the average forecast by over $300 million. The company comprises 3.4% of the Dow index. The stock sank 0.9% on Tuesday.
Goldman Sachs (GS), which represents 7.4% of the Dow index, missed consensus slightly (just 4 cents) on the bottom line but handily bested revenue expectations by $685 million. The stock lost 1.6% on Tuesday.
Procter & Gamble (PG), 2.9% of the index, reported results early Wednesday and saw revenue of $21.87 billion climb over 6% from a year ago. The company handily beat consensus on the top and bottom lines, and its outlook was healthy enough to boost the stock by 1.7% in the premarket.
Travelers (TRV) beat consensus on the top line early Wednesday but missed on the bottom line. The stock is roughly even in the premarket. It makes up about 3.6% of the index.
What they said about the market – Ole Hansen
Ole Hansen, a commodity strategist at Saxo Bank, warns that the current conflict between Hamas and Israel is sending investors deep into oil, gold and other commodities. Hansen said this is even more impressive while bond markets are spitting out such attractive yields.
“The threat of an escalation [in the Israel-Hamas conflict] has given a fresh boost to crude oil while demand for hedging and safe havens continue to support precious metals.”
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 Industrial Average forecast
The Dow Jones Industrial Average is positioned for further losses. The 50-day Simple Moving Average (SMA) has just crossed below its 100-day counterpart, a bearish signal. The index has been moving higher since it found a supportive perch between October 3 and 6 in the area of the 32,900s, but the bearish crossover mentioned above and the lower lows seem likely to continue.
The break of 33,700 was the big tell here since the DJIA then produced a new lower low that was substantially below the previous low from August 25 (34,029). The next supportive price band comes at 32,500 to 32,800. That area pushed the DJIA back up from December 2022 through May of this year.
Dow Jones Industrial Average daily chart
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Author
Clay Webster
FXStreet
Clay Webster grew up in the US outside Buffalo, New York and Lancaster, Pennsylvania. He began investing after college following the 2008 financial crisis.
