Dow Jones Industrial Average Forecast: DJIA advances 0.73% on drop in June inflation
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- The Dow Jones Industrial Average has gained 1.56% in the first two trading sessions this week.
- DJIA futures jumped 0.5% on Wednesday morning following CPI release.
- US CPI data lower than expected, stock market rallies across the board.
- DJIA trades within a symmetrical triangle pattern with bullish price target of 35,378.
- NASDAQ 100 rebalance could affect Dow Jones negatively.
The Dow Jones Industrial Average (DJIA) advanced 0.73% at Wednesday's open following a better-than-expected June inflation release. The NASDAQ did even better, surging 1.22% at the open.
The June core CPI arrived on Wednesday morning at 4.8% YoY. This was below the 5% forecast and is bullish for the stock market as a whole. Both core CPI and headline CPI rose 0.2% MoM, which was below the 0.3% consensus for both. YoY headline inflation of 3% arrived below the 3.1% consensus. Dow futures spiked from 0.1% to 0.5% on the news.
The Dow Jones index has already added 1.56% this week, and Dow futures are ticking higher early Wednesday ahead of the Consumer Price Index (CPI) release for June.
The NASDAQ 100 rebalancing announced this week may negatively affect the DJIA however, and it appears that traders are not yet factoring that headwind into their trading view. The weighting of Microsoft (MSFT) and Apple (AAPL) – both Dow holdings – will be reduced in the NASDAQ 100, which should lead to increased selling pressure over the next two weeks.
Dow Jones news: June core CPI at 4.8% YoY, below expectations, stock markets celebrate
US CPI ex Food & Energy printed a 4.8% rise YoY in June, below 5.0% expectations. All inflation release numbers came below the consensus numbers, with both headline and Core CPI monthly at 0.2% below 0.3% expected and headline US CPI YoY at 3%, below 3.1% expected.
The result is unlikely to lead to a change of view on whether the central bank raises interest rates on July 26. The market is near certain at this point that the Fed will raise the fed funds rate by 25 basis points to a 5.25% to 5.5% range at the FOMC meeting exactly two weeks from now.
On Monday, the Federal Reserve Bank of New York's monthly Survey of Consumer Expectations reported that US consumers' one-year inflation expectation fell to 3.8% in June from 4.1% in May. This was the lowest result from the survey in more than two years.
Dow Jones Industrials and the whole stock market are rallying on the back of this release. This is because it lowers the chances that the Fed will go forward with another rate hike after July’s FOMC meeting. In recent Congressional testimony, Fed Chair Jerome Powell stated that two more rate hikes were the most likely event following June’s pause. Last Friday’s Nonfarm Payrolls figure was greeted warmly by the market since new hiring fell below consensus for June. However, continued growth in hourly wages concerned those rooting for an immediate solution to the wage-price spiral.
Dow Jones news: NASDAQ 100 rebalancing bodes poorly for Dow outlook
Earlier this week, the leadership behind the NASDAQ 100 decided that the growth-oriented index had become too top-heavy. The so-called Magnificent Seven stocks – Apple, Microsoft, Alphabet (GOOGL), Amazon (AMZN), Meta Platforms (META), Tesla (TSLA) and Nvidia (NVDA) – exploded in the first half of the year to comprise 48% of the index. Market pundits believe this rebalancing will push these seven outliers back down to 40% of the total weighting.
This means that Dow holdings Microsoft and Apple will both be sold off by a number of NASDAQ 100-following ETFs and funds like the $200 billion Invesco QQQ Trust (QQQ). Wells Fargo put out a research note saying that these two mega-cap stocks lead its “top up-sizers” list.
Thus far, the NASDAQ 100 leadership have not released the precise weighting of the new index, but those figures will be released on Friday, July 14. The new weighting will take effect on Friday, July 21 before its trading debut on Monday, July 24.
"The upcoming NDX rebalance is reducing concentration risk but creating uber-cap selling pressure," Wells Fargo equity analyst Chris Harvey wrote on Tuesday.
Wells Fargo forecasts that Microsoft stock will have its weighting reduced by 1.8 percentage points and that Apple’s weighting should decline by about 1.7 percentage points. Currently, Microsoft makes up 6.44% of the Dow Jones weighting, while Apple makes up 3.44%.
Dow Jones forecast
The Dow Jones index begins Wednesday inside a resistance zone stretching from 34,200 to 34,600. This region has pushed prices lower at least seven times since December 2022. Bulls are still gunning to break above the 34,600 level and then shoot for the resistance range between 35,350 and 35,500. That latter range hearkens back to March and April of 2022.
More significantly, the Dow finds itself trading within a symmetrical triangle formation. This pattern began its descending trendline on June 16 at a high of 34,588. The ascending bottom trendline began at the low of 33,610 on June 26. This pattern is neutral, and only a breakout in either direction will tell us which way the wind blows. A breakout in either direction has a price target equal to the distance between the high and low of the pattern’s beginning from the breakout point. The difference in this case is 978 points, and if we add that to a breakout estimate of 34,400, we get an expected price target of 35,378. On the downside, we get an expected bearish price target of 32,722.
Though the index could breakout in either directions, to be clear, the Moving Average Convergence Divergence (MACD) indicator has crossed over negatively at the end of last week.
Medium to longer-term support exists from 32,600 to 32,800 and from 31,430 to 31,805.
DJIA daily chart
