Dow Jones Industrial Average Forecast: DJIA falls despite positive US Service sector data

Dow Jones index weakens over half a percent on Tuesday,
WTI Oil reached $88 per barrel on Tuesday.
US Treasury yields fall across maturities, except for 3-month bill.
US ISM Services PMI for August arrives at 14:00 GMT after the opening bell on Wednesday.
UK, China, Germany experience drop in service sector dynamism simultaneously.

The Dow Jones Industrial Average (DJIA) is off 0.7% during the US session on Wednesday despite better-than-expected data from the ISM Services PMI for August. The service sector expanded, according to the index. The reading arrived at 54.5 rather than the 52.5 expected by analysts. The August reading showed an improvement over July's 52.7 reading. Despite the good news, the S&P 500 lost 0.5%, while the NASDAQ Composite shed 1%.

The Dow Jones fell 0.56% on Tuesday in the week’s first outing after the Labor Day market close.

Higher Oil prices are sending shivers down the spine of global equity markets this week. WTI Oil reached $88 per barrel on Tuesday and, on Wednesday, relaxed down close to $86. Oil prices have risen by 25% since June alone. The market worries that higher prices at the pump will push an already weakened global economy into more pain.

Dow Jones News: OPEC+ bigwigs extend supply cuts

Although crude prices have been trending higher since June, the market’s renewed focus on the matter was brought about by Saudi Arabia and Russia both extending prior cuts until at least December.

Saudi Arabia decided to leave its 1 million barrel-a-day supply cut in place through December, while Russia said it would extend its 300,000 barrel-per-day export cut through the same time period. This left analysts, already worried about a lack of supply, more negative than they’ve been in a while.

The idea making the rounds is that higher oil prices will lift headline inflation and could slowly seep into many areas of the economy, eventually forcing firms to raise prices. Higher inflation could then possibly keep the Federal Reserve’s foot on the accelerator as far as interest rates are concerned.

"If the oil price persists at current levels, it may slow disinflation rather than reignite inflation,” said UBS analyst Paul Donovan on Tuesday.

The US Congress has decided to release 1 million barrels of gasoline from its strategic Northeast Gasoline Supply Reserve. The reserve was set up in the wake of 2014’s Hurricane Sandy that devastated the fuel supply in the northeastern section of the US. The reserve has never been used. Critics say the added supply is too small to make much of a difference to Oil prices.

The American Petroleum Institute’s Weekly Crude Oil Stock report arrives late Wednesday and will tell the market whether inventories are being replenished. Last week, the reading showed inventories dropping by a whopping 11.486 million barrels.

US ISM Services PMI to determine market direction

At 14:00 GMT on Wednesday, the Institute for Supply Management will release its Services Purchasing Managers Index (PMI) for August. Investors are doubly focused on this release because China, the UK and Germany all released service sector PMIs on Tuesday that underwhelmed analysts.

China’s PMI was roughly in line with consensus but showed a rather steep drop in service sector dynamism, although the print still showed a slightly expanding service sector. Germany and the UK, on the other hand, both fell into contractions.

The worry is that these contractions may be contagious. If the US ISM Services PMI for August shows contraction, then all hell will break loose. Analysts far and wide will say it foreshadows a coming global recession.

As it stands, analyst consensus says that the figure will fall from 52.7 in July to 52.5 in August – a much more gradual slowdown than others.

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.

What they said about the market – ING

ING released a client note comparing different reasons for why the 10-year US Treasury initially moved toward 4% following the US Nonfarm Payrolls for August last Friday but then did an about-face and lurched back toward 4.25%.

Here on Wednesday, the Treasury market is again drawing spectators. Yield on the 3-month bill is up 0.5%, but the rest of the curve has uniformly seen yields drop.

"[T]he curve remains very inverted, with longer tenor yields anticipating falls in official rates in the future. That’s a normal state of affairs. But as long as the economy continues to motor along, the wisdom of having many rate cuts at all is being questioned by the market. Less future rate cuts raise the implied floor being set by the fed funds strip. That floor continues to edge higher.”

Dow Jones Industrial Average forecast

The Dow Jones index seems to be rolling over once again. That’s interesting because if it continues, then the Dow could pretty quickly fall into a full-fledged downtrend. The Dow has been in an uptrend since March.

To meet the criteria for a proper downtrend, the DJIA needs to close below the 34,029 low reached on August 25. One reason why this looks to be a real possibility this time is that the final three sessions of last week (August 30 through September 1) all had daily candles with long wicks on top. This means that bulls successively made attempts to push price action higher but kept being pushed off the cliff.

If the Dow does find its footing soon, then it will likely be within the 34,250 to 34,600 range. If 34,250 does not hold, however, then the DJIA will move back to either 34,029 or 33,700 from June and July.

Another important hint is how the Dow index acts around 34,712. That was the high from December 13, 2022, that took most of 2023 to retake. A break above that level could mean that the market has forgotten about high oil prices or service sector weakness and is once again making a run at 35,200.

Dow Jones Industrial Average daily chart

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