Dow Jones Industrial Average Forecast: DJIA rises on Thursday though five-week rally likely at an end


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  • Dow Jones Industrial Index gained 11.8% over the previous five weeks but sold off from Monday through Wednesday of this week.
  • US Jobless Claims arrived slightly below consensus on Wednesday.
  • US Treasury yields are falling in the front half of the curve but rising in the back half.
  • US Nonfarm Payrolls, Unemployment Rate and Average Hourly Earnings data will hold sway over US markets on Friday.
  • DJIA is now in spitting distance of all-time high at 36,952 from January 2022.

 

The Dow Jones Industrial Average (DJIA) looks like it might end its five-week streak of gains this week as the index drifted lower during the first three sessions through Wednesday. The DJIA gained 0.17% on Thursday and would only eke out another weekly gain if it rallies intensely on Friday.

The S&P 500 and NASDAQ Composite rose 0.8% and 1.37%, respectively, on the Thursday. The stock market benefitted from US Jobless Claims data in the morning that showed fewer job losses than expected. Additionally, US Treasury yields are trading lower at the front of the yield curve.

The market is primarily focused on November Nonfarm Payrolls data that will be released on Friday, alongside Unemployment Rate and Average Hourly Earnings reports for the same month.

Dow Jones News: US Initial Jobless Claims tick higher but below forecast

US Initial Jobless Claims for the week ending December 1 were reported on Thursday morning at 220K. This was slightly higher than the 219K reported the previous week but below the 220K forecast. 

Continuing Jobless Claims dropped precipitously from the previous report of 1.925 million to 1.861 million as well. This figure was noticeably lower than the 1.91 million consensus.

Taken together, these reports show a labor market holding up in spite of the Federal Reserve (Fed) strategy of holding interest rates “higher for longer”. Additionally, the data is more fodder for the market’s popular narrative of a “soft landing”.

For the most part, inflation readings have been trending lower all year, but the central bank’s higher interest rate environment has not translated into major job losses as some had expected. Lower inflation alongside a relatively healthy labor market is a recipe for an optimistic stock market, and that is why equities are trending higher on Thursday.

Contrasting with the first two reports was the Challenger Job Cuts report, which also was released Thursday morning. It showed corporate layoffs in November jumping from the 36.8K reported previously to 45.5K.

Nonfarm Payrolls, Unemployment Rate, Michigan Consumer Sentiment make market data-dependent on Friday

Friday is gearing up to be a heavy session that should see plenty of volatility based on the release of a slew of economic indicators.

First up and most important is the November Nonfarm Payrolls report. Consensus calls for 180K new hires in November, up from 150K in October. Anything below 200K will likely excite equity traders, while a figure above 200K will worry many. Weaker but not too weak NFPs are fawned over by the market at this time as evidence that demonstrates to the Fed that it's okay to pull the proverbial foot off the gas pedal.

The Unemployment Rate in November is expected to sit still at 3.9%. A lower reading might also worry the market as a tight labor market stands to push up wage inflation. On that note, Average Hourly Earnings for November are expected to grow by 0.3% from October and 4% from a year earlier. This compares to October data showing 0.2% MoM growth and 4.1% annually.

In addition, the preliminary Michigan Consumer Sentiment Index for December will see the light of day on Friday. The index is expected to show a rise from 61.3 to 62 as the holiday season acts to reinvigorate optimism.

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: DJIA should finally take a breather this week

The Dow Jones index is consolidating this week after a brisk 11.8% advance over the previous five weeks. This was one of the quickest index corrections in decades, and traders should not be surprised if investors decide to take profits now.

A pullback to the August 1 range high at 35,679 should not worry bulls, but a break below it may do so. The 4-week Simple Moving Average (SMA) is moving nearly in line with that resistance point, so it would be unsurprising if the index uses it for support this time around.

Much of the market probably wants to hold onto its gains however. This is because common wisdom says that it's unwise to sell as you near all-time highs. 36,952, the all-time high from the first days of trading in January 2022, beckons bulls to hold on.

The best bet for bulls is to furnish a price target of 37,750 and stick to it. This is the 161.8% Fibonacci level (not pictured) based on the October low. While the daily chart has been showing oversold readings lately, the weekly chart’s Relative Strength Index (RSI) still sits in the low 60s and should probably allow for more upside in this rally.

Dow Jones Industrial Average weekly chart
 

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