Is The Dow Jones A Bit Toppy?

Marius Paun | London, UK | Senior dealer | Thursday, 18th February 2021

The US stocks fell sharply on Thursday afternoon with Dow Jones retracing 300 points after the Labor Department released a disappointing weekly initial jobless claims report. The data showed a jump to one month high, 861,000 vs 765,000 expected, raising fresh questions as to whether the labor market recovery has stagnated. We saw a string of better than anticipated economic numbers lately, so this one brings worries the ongoing pandemic may delay the overall economic rebound.

Another reason for the fall was bonds yields pushing higher, thus fuelling concerns that increased borrowing costs could snap the current rally to record highs. In particular, yields on 10-year US Treasuries rose to 1.31%, the top for the year. As a result, the tech sector, one of the main drivers so far, is looking especially vulnerable to inflationary pressures.

However, the Dow is still within touching distance of its all-time high. Furthermore, it reached another record high yesterday as the earnings season continued to beat consensus, which was a good omen for stocks. There will be over 700 companies reporting their figures this week and more than 1,000 next week. If the positive surprises continue, we could see the rally resuming.

The next stimulus package is anticipated to be passed by mid-March as the extended federal unemployment benefits will start to expire on March 14th. First, the House of Representatives is expected to pass the proposed $1.9 trillion bill by the end of February and the Senate is expected to follow suit by the middle of next month.

The drop in coronavirus figures is another bullish feature for both the real economy and stock markets as more and more areas can reopen after the lockdown. Yes, the current snowstorm (see Texas disruptions) has caused some stress, already delaying the reopening. But once the weather gets better, the markets expect the pent-up demand to trigger quite a boom.

Meanwhile, jobless claims numbers aside, the economic data continued to impress. Even with the national vaccination program underway although possibly behind the initial plan, data indicated a strong recovery coming out of the pandemic. Retail sales report showed a better than anticipated 5.3% increase month on month vs expectations for 1.1%. It is the biggest rise in seven months to January and thought to be a consequence of government stimulus lifting consumer spending.

Additionally, the Federal Reserves’ latest meeting minutes indicated the US Central Bank is in no mood to give up its aggressive asset purchasing program and /or the low-interest rates pledge to boost economic growth.

So yes, the Dow together with the major US indices might look a bit toppy and a further pullback could be on the cards but is it enough to stop the current bull run even allowing for rising yields and inflation?

The Dow continued its advance from the last report on November 20th as bulls remained in control. The chart shows a steady rally interrupted briefly by a short-lived selloff at the end of January/ beginning of February this year. It even made a new all-time high at 31,724 two days ago. The short-term moving averages (red line) is back above the long-term MA (blue line) and both are again pointing upwards.

On the upside, the bulls tried to push the price back above 31,700 this morning but failed to do so which triggered the selloff. A close above it could build momentum and spur renewed buying with a retest of the record high. The flattening of the short-term MA during the last two sessions could indicate that consolidation around the current levels is also a possibility. On the downside, 31,250 – 31,300 range should act as the first line of support. Bears will also look for a break below the psychologically important 31,000 marks to attract extra selling power.