On Tuesday, the Dow Jones Industrial Average, arguably the most famous stock market index in the world, fell 300 points. This drop was, of course, as investor sentiment faced a slew of mounting headwinds. The index includes the 30 most actively traded and widely held stocks within the United States. Worse yet, it has tracked a wider downward trend that the whole stock market is undergoing. This decline was fueled by positive moves on key economic indicators, expected announcements from the Federal Reserve and continued updates from post trade negotiations.
That’s what investors are looking for right now. Additionally, they are still trying to digest the mixed picture between macroeconomic data and corporate earnings reports. Together, these factors have put the Dow Jones Industrial Average in a tough position. It’s been bouncing around or below its 50-day Exponential Moving Average (EMA) of 41,144, up against a price ceiling at 41,000.
The Structure and Criticism of the Dow Jones Industrial Average
The Dow Jones Industrial Average dates back to 1896. It provides a highly anticipated window into the health of the American economy by measuring the performance of 30 of the largest conglomerates. It has come under fire for its lack of representation of the overall market. Critics would point out that creating a metric based on just 30 concentrated stocks hardly captures the dynamic, vibrant, real diverse nature of the U.S. economy.
The small pool of companies in the index is troubling. Investors are rightfully beginning to doubt its usefulness as a benchmark. Second, the Dow is a poor proxy for overall market health. Its narrow focus fails to account for key sectors that drive long-term economic growth and stability.
Even with issues flagged above, the Dow remains a beacon that many investors rely on to gauge the health and direction of the market. Exchange-traded funds (ETFs) allow investors to buy or sell a whole index through a single security. This strategy allows investors to benefit from market trends without having to purchase and trade individual stocks.
Market Dynamics and Influential Factors
On Tuesday — when the Dow was down over 300 points — much of that drop was blamed on overseas economic pressures. Investors are still looking for key signs about bilateral trade agreement. The U.S. has been negotiating with up to 17 or 18 other countries. These agreements so far have tremendous potential to benefit all sectors of the economy. So, in part because their future impacts have been uncertain, investor hesitance has led to a greater risk aversion.
Besides trade negotiations, the Federal Reserve’s next interest rate move is the other big piece to watch. Even more importantly, the Fed’s policy moves can greatly bias the market in one direction or another. From current predictions, rate markets are looking for as much as 100 – 125 basis points of cuts over the next year. These kinds of turns could have far-reaching impacts not just on borrowing costs but on broader economic activity.
The combined performance of industries represented by the Dow is also facing pressure as quarterly earnings reports start rolling in. We hope that these reports will shed light on just how well or poorly these massive conglomerates are weathering the storm of today’s economic challenges. Strong results might help reassure nervous investors, while a letdown in earnings would add to the sense of doom already haunting the market.
Technical Analysis and Investment Strategies
From a technical standpoint, the Dow Jones Invention visibility has proved stiff resistance at this barrier. Investors are sending a clear message that this level is critical for building upward momentum. If the index manages to clear this hurdle, it could be the first signal that more bullish traders are coming back to the game.
If it does not manage to remain above that 50-day EMA of 41,144, beware! A breach below this area might indicate a new bearish trend is coming. In addition, the horizon of view is dictated by the 200-day EMA, now located at 41,620. As highlighted by the yellow arrows, this level serves as a powerful leading price action and sentiment indicator of bullish price action and accumulation.
Most investors are taking a defensive posture. Some investors balance their portfolios by purchasing exchange-traded funds that track the Dow Jones Industrial Average. Still, others are cautious and on the defensive considering the unknowns that still surround both trade negotiations and the direction of monetary policy.