The Dow Jones Index has wavered in the past few days as the recent bullish momentum stalled and concerns in the stock market remained. It was trading at $50,877 on Tuesday, a few points below the year-to-date high of $51,642. This article highlights some of the top risks facing the Dow Jones and the DIA ETF.
Dow Jones Index at risk as US bond yields jump
One of the key risks facing the blue-chip Dow Jones Index is the rising bond yields, which have been triggered by the elevated inflation and soaring US government bond.
The two-year yield has jumped to 4.2%, while the benchmark ten-year has spiked to 4.5%. Also, the long-term 30-year yield remains stubbornly above 5%.
These yields have steadied in the past few days after the US published strong macro numbers. Data by ISM and S&P Global showed that the manufacturing and services PMIs remained above 50 in May. A PMI reading of 50 and above is a sign that a sector is expanding.
Another report showed that the labor market is doing well, with the economy adding over 300k jobs in the past two months. Consumer and producer inflation, on the other hand, remains stubbornly above the Fed’s target of 2.0%. Worse, tensions in the Middle East are flaring, which may lead to a prolonged conflict.
Therefore, the Dow Jones faces the risk of a Federal Reserve interest rate hikes this year. Indeed, Polymarket and Kalshi traders believe that the bank will hike interest rates two times this year. In most cases, the Dow Jones tend to underperform the market whenever the Fed is hiking.
The risk of a technology stock reversal
The past few days have been highly volatile for the technology sector. This volatility surged after Broadcom published its financial results. While positive, these results led to a major sell-off on Friday and another one on Tuesday this week.
Valuation numbers shows that many large tech companies like Nvidia, Micron, and Sandisk are not all that overvalued. Nonetheless, technicals suggest that some of them have become highly overbought, which may lead to a big reversal as investors start to book profits.
Indeed, some Wall Street analysts have started warning about this. In a note on Tuesday, analysts at Citigroup warned that investors were increasingly shorting US stocks as they position themselves for a reversal. Barclays and Goldman Sachs warned of risks in the stock market.
SpaceX IPO risk
The other potential risk for the Dow Jones and other US stock indices is the upcoming SpaceX IPO, which takes place on Friday this week. This will be the biggest IPO on record, with data showing that it is highly oversubscribed.
This positioning means that the stock will surge hard after the IPO happens. However, history shows that even the best companies face major reversals after that. This includes companies like Figma, Circle, and Bullish. Therefore, if this happens, chances are that the broader stock market will reverse.
Technicals points to a Dow Jones reversal
To be clear, we believe that the Dow Jones and the DIA ETF stock will remain in a bullish trend in the coming years. However, there is a risk that they will retreat in the near term as investors book profits.
One main reason for this is that the index is going through a bearish divergence patern. As the chart above shows, the two lines of the Percentage Price Oscillator (PPO) have reversed and are pointing downwards. The Relative Strength Index has also pointed downwards.
Therefore, these indicators points to more downside in the near term ahead of another bullish recovery.
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