Dow Theory Update: Bullish Reversal in July

What’s in Today’s Report:

  • Dow Theory Update – Bullish Reversal in July
  • Central Bank Decision Expectations: Fed, ECB, and BOE this Week

Futures are modestly lower as traders digest mixed mega-cap tech earnings and look ahead to today’s Fed decision.

On the earnings front, GOOGL is up 8%+ in premarket trade thanks to strong reported revenue growth while MSFT is down 3.5% on soft sales and weaker guidance specifically in the company’s cloud computing division.

Today, there is one economic report to watch: New Home Sales (E: 727K) before focus will turn to the Fed with the FOMC Meeting Announcement at 2:00 p.m. ET (E: +25 bp hike) and Fed Chair Powell’s Press Conference at 2:30 p.m. ET.

A busy week of earnings will also continue with T ($0.60), BA (-$0.99), and KO ($0.72) releasing quarterly results before the bell while META ($2.87) and STX (-$0.26) will report after the close.

Tom Esaye Quoted in Market Watch on July 17th, 2023

As the Dow hits 2023 high, one of the oldest stock-market forecasting tools is making a comeback

Despite numerous warning signals from cross asset analysis, including the still deeply inverted yield curve, Dow Theory, which is one of the most historically accurate strategies to identify the primary trend in the stock market, is now saying the path of least resistance is higher for the first time since April of 2022, said Tom Essaye, founder of Sevens Report Research and a former Merrill Lynch trader, in a Monday note to clients. Click here to read the full article.

Special Technical Analysis Report

What’s in Today’s Technical Report:

  • Near and Medium-Term Trends and Risks in the S&P 500
  • A Look at Current Dynamics in the Major U.S. Equity Indices
  • Dow Theory Update
  • Key Levels to Watch in the Dollar and Commodity Markets
  • Equity Sector Dashboard (Bullish – Bearish – Neutral)
  • Treasury Market Trend Analysis: Have Rates Peaked for the Cycle?
  • What to Watch in the VIX

S&P 500 futures are little changed to start the week this morning. Last week’s pullback paused at a longer standing, multi-week uptrend line leaving the broader equity at a tipping point. How the market trades today will very likely decide if the S&P will continue to bleed lower or break last week’s downtrend and retest the recent highs.

The Nasdaq has been a notable outperformer this year but there are cracks emerging in the rally and we outline key levels to watch this week within the Report.

Among the sectors, we view five sectors as trending higher, four as market neutral, and two as trending lower.

In the currency and bond markets, both the dollar and multiple benchmark Treasury Notes have pulled back to critical price support zones and whether those levels hold or not will have a varying impact on all asset classes.

Commodities as an asset class have been fluctuating in a tight range in 2023 with gold outperforming and oil underperforming, but there are signs that oil is poised to take the lead in the complex and gold may be losing upside momentum.

Finally, the VIX is still deeply under pressure which is confusing many investors but we dive into the specific reasons for the movement in the index and what to look for in the weeks and months ahead as we continue to navigate this historically difficult market backdrop amid very uncertain macroeconomic dynamics.

Does Dow Theory Outperform? (Yes)

What’s in Today’s Report:

  • A Good Question on Dow Theory Returns Over the Years

Stock futures are little changed this morning while bond yields are moving higher with the 2-Yr Note yield notably trading above 4% as banking fears continue to ease although markets still remain on edge.

There were no market moving economic reports overnight and news wires were generally quiet.

Looking into today’s session, there are several economic reports due to be released in the U.S. including: International Trade in Goods (E: -$90.0B), Case-Shiller Home Price Index (E: 3.7%), FHFA House Price Index (E: -0.2%), and Consumer Confidence (E: 101.0).

Shortly after the open, the Fed’s Barr will testify before the Senate beginning at 10:00 a.m. ET regarding the recent banking turmoil and state of the financial industry. Any negative comments or developments during the testimony that weighs on bank shares will very likely drag down the broader market.

Looking to the afternoon, there is a 5-Yr Treasury Note auction at 1:00 p.m. ET that could impact the broader bond market and move stocks.

Why There’s Some Cause for (Cautious) Optimism

What’s in Today’s Report:

  • Why There’s Some Cause for Cautious Optimism

Futures are slightly lower following a quiet night of news as markets digest Thursday’s rally.

Economically the only notable number was the UK Home Price Index, which like the U.S. readings this week saw smaller than expected declines, falling –0.1% vs. (E) -0.7%.

Geopolitically, Russia continued Thursday’s missile bombardment of Ukraine is a clear signal that fighting will rage on as the New Year begins.

Trading today will be dominated by book squaring and year-end positioning but there is one notable economic report, Chicago PMI (E: 41.0), and if it’s weak it could weigh on markets moderately.

Dow Theory Update (Bearish)

What’s in Today’s Report:

  • Dow Theory Update (Bearish)
  • VIX Analysis Update

Futures are moderately higher following positive China COVID news.

Chinese authorities said they hoped to end all lockdowns in Shanghai by May 20th as cases continue to fall.  If the Chinese economy can fully reopen in the coming weeks that will remove a big headwind from stocks.

Economically, EU Industrial Production wasn’t as bad as feared, as IP fell –1.8% vs. (E) -2.0%.

Today the focus will be on the inflation expectations contained in the Consumer Sentiment (E: 63.7) report and if five-year inflation expectations can decline from 3%, that will be another anecdotal signal that inflation pressures have likely peaked (and it should add incrementally to this morning’s rally).     We also get two Fed speakers, Kashkari (11:00 a.m. ET) and Mester (12:00 p.m. ET), but we don’t expect them to move markets (look for them to reiterate the current Fed mantra of two more 50 bps hikes).

Technical Update

What’s in Today’s Report:

  • Technical Update – Bearish Price Patterns and Dow Theory Threatens to Turn Bearish

Futures are modestly lower this morning after a quiet night of news as yesterday’s big intraday reversal higher is being digested.

Today is lining up to be a busy one with a slew of economic data due to be released, in order of importance: Durable Goods (E: 1.0%), Consumer Confidence (E: 106.8), Case-Shiller Home Price Index (E: 1.5%), FHFA House Price Index (E: 1.6%), and New Home Sales (E: 772K). Investors will want to see solid data that contradicts the growing fear that the Fed is getting more aggressive with policy into an economic slowdown.

There are no Fed speakers today but there is a 2-Yr Treasury Note auction at 1:00 p.m. ET that could move the bond market and ultimately impact stocks in the early afternoon.

The market’s main focus today will be on earnings with: UPS ($2.87), PEP ($1.24), GE ($0.20), MMM ($2.33), and JBLU (-$0.85) reporting ahead of the bell while MSFT ($2.18), GOOGL ($25.63), GM ($1.57), V ($1.65), and COF ($5.39) are all scheduled to release results after the close.

Bottom line, for yesterday’s late day reversal higher in equity markets to continue today, we need to see good economic data, steady or falling bond yields, and most importantly favorable earnings, especially out of big tech names like GOOGL and MSFT.

Dow Theory Update

What’s in Today’s Report:

  • What the Early-November Squeeze in the Dow Transports Means for the Broader Equity Markets

Stock futures are little changed this morning as a hot U.K. inflation report is digested ahead of more retail earnings.

U.K. CPI rose 4.2% vs. (E) 3.9% year-over-year which is pushing the pound higher against most of its peers as rate hike expectations rise.

Today, there is just one economic report: Housing Starts & Permits (E: 1.587M, 1.630M) but it is another very busy day of Fed speak: Williams (9:10 a.m. ET), Mester (11:20 a.m., 12:40 p.m. ET), Waller (12:40 p.m. ET), Daly (12:40 p.m. ET), Evans (4:05 p.m. ET), and Bostic (4:10 p.m. ET).

There is also a 20-Year Treasury Bond auction at 1:00 p.m. ET that could move yields and investors will be closely watching earnings releases from notable retailers ahead of the open: TGT ($2.87) and TJX ($0.81) as well as NVDA ($1.10) after the close.

Dow Theory Update

What’s in Today’s Report:

  • Dow Theory Update

Futures are modestly lower to start the fourth quarter as House Democrats failed to pass infrastructure legislation, while economic data was better than expected.

House Democrats remain divided about the size of the infrastructure and reconciliation bills, and the Debt Ceiling can’t be increased until a compromise is found.

EU and UK global final PMIs slightly beat estimates while EU Core HICP (their CPI) was slightly hot (1.9% yoy vs. (E) 1.8% yoy), implying the global recovery remains on track and that inflation pressures are still firm.

Today’s focus will be on important economic reports.  First, the Core PCE Price Index (E: 0.2%, 3.6%) is the Fed’s preferred measure of inflation and if it’s much hotter than expectations, that will push yields higher and be another headwind on stocks.  Also, the ISM Manufacturing PMI (E: 59.8) gets released and markets will want to see stability there.  We also get Consumer Sentiment (E: 71.0) and the inflation expectations component will be closely watched.  Finally, there are two Fed speakers today, Harker (11:00 a.m. ET) and Mester (1:00 p.m. ET) but neither should move markets.


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What Is Dow Theory Saying Now?

What’s in Today’s Report:

  • What is Dow Theory Saying Now
  • 10’s-2’s Yield Spread and Bank Stock Outlook (Post Powell’s Press Conference)

Futures are bouncing slightly ahead of the jobs report and following yesterday’s modest declines.  Generally it was a quiet night of news.

EU Core HICP (their CPI) was stronger than expected, rising 1.2% vs. (E) 1.0% and incrementally added to the modest hawkish shift in the global central bank outlook following Powell’s press conference.

Today the headline numbers are the Employment Situation Report (Jobs: 180K, UE: 3.8%, Wages: 0.2% m/m) and the ISM Non-Manufacturing PMI (E: 57.3).  If the jobs number is very strong (job adds above 250k, UE below 3.7% and wages above 3.5% yoy, that might cause a decent sell off given Powell’s hawkish surprise on Wednesday, but barring that it shouldn’t impact markets too much.

Absent a jobs report surprise, the two biggest events today are comments by Fed Vice Chair Clarida (11:30 a.m. ET) and Williams (1:45 a.m. ET).  Specifically markets will be looking to see whether they echo Powell’s “transitory” comments about inflation, or if they sound more concerned.  The former will pressure stocks, while the later might provide some relief.

Other Fed officials speaking today include: Evans (10:15 a.m. ET), Bowman (3:00 p.m. ET) and after the market close: Bullard, Daly, Kaplan, Mester.