Dow Jones Industrial Average Forecast: Futures drop ahead of August CPI print
- The Dow Jones Industrial Index lost 0.75% last week.
- WTI Oil is nearing $90 on Wednesday after advancing.
- US Treasury yields rise, even more heavily for longer maturities.
- US CPI for August released one hour before Wednesday’s opening bell.
- Arm IPO should usher in market excitement this week.
The Dow Jones Industrial Average (DJIA) has been unable to hold onto its rallies so far this week as both Monday and Tuesday witnessed impressive advances give back most of the gains in the afternoon sessions. Oil prices have extended their rally, with WTI having nearly reached $90, heading into Wednesday morning’s US Consumer Price Index (CPI) release for August.
The market is expecting that monthly headline inflation will rise but core inflation will remain in line with July’s monthly reduced growth rate. As always, a major upside miss of the consensus expectation could deal a major blow to the Dow Jones index and the entire stock market.
Then the Arm IPO, which prices on Wednesday but begins trading on Thursday, could lead to an uptick in positive sentiment for the entire equity market as it reported to be oversubscribed.
The Dow, NASDAQ 100 and S&P 500 futures are all down around 0.1% in Wednesday’s premarket.
Dow Jones News: CPI to set tone for September
The CME Group’s FedWatch Tool gives a 93% chance that the Federal Reserve keeps interest rates flat at its September 20 meeting next Wednesday. The only thing that could change that is if the August CPI comes in hot enough that the central bank determines more tightening is necessary to ensure that inflation does not pick back up.
Headline inflation is already expected to rise in August due to higher gasoline prices. This puts consensus for headline inflation at 0.6% MoM, well above July’s 0.2% rate. The YoY print is expected to rise from 3.2% in July to 3.6% in August.
The more important core inflation reading, which strips out food and energy prices, is forecast to arrive at 0.2% on the monthly reading and 4.3% on the annual reading, down from the previous month’s 4.7%.
It’s the usual game plan. If inflation is lower than expected, stocks are more likely to rally. On the opposite side, if inflation comes in above the consensus, the stock market will likely end the session and week lower.
Oversubscribed Arm Holdings IPO could lead to September tech rally
There appears to be plenty of excitement over the Arm Holdings IPO. The UK company that licenses semiconductor designs found in nearly all smartphones will price on Wednesday and begin trading on Thursday.
Arm is currently entirely owned by Japan’s SoftBank (SFTBY), which wishes to sell about 10% of the company. Initially, Arm floated a range of $47 to $51 a share, which would value itself between $50 billion and $54 billion. The circa $5 billion offering, however, was wholly purchased on its first day after being oversubscribed by Wall Street banks’ clients, and the rumor is that it will be priced toward the top of the range.
Additionally, a large group of Arm’s customers – including Taiwan Semiconductor (TSMC), Apple (AAPL), Alphabet (GOOGL), Advanced Micro Devices (AMD), Nvidia (NVDA), Intel (INTC) and Samsung (SSNLF) – are purchasing approximately $735 million of the offering.
CEO Rene Haas has been making the rounds and has reportedly claimed that Arm will grow revenue in the high teens for the next several years. The strong demand the IPO has received could easily translate on Thursday into a euphoric rally as the retail crowd attempts to take its own bite.
Dow Jones FAQs
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.
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.
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.
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 primary takeaway from the daily candlestick chart show below is that Monday and Tuesday both experienced impressive rallies that both dissipated. The long top wicks below look similar to the three sessions between August 30 and September 1. Those long top wicks ended up foreshadowing a mild pullback in the Dow index.
If the Dow index begins trading further below the 34,600 level, then it may be time to bail. Support comes in at the bottom of that resistance-turned-support range at 34,250 and then beneath there at 34,029.
Bulls will look at how the short-term range low on September 6 amounted to a higher low than the August 25 range low. In other words, this is a bullish sign. The Dow index appears to be closing in line with the 21-day Simple Moving Average (SMA) over recent sessions, so bulls will need to close above there in order to demonstrate their power. That move would allow another run at the 35,200 to 35,750 supply zone.
Dow Jones Industrial Average daily chart