Dow Jones (DIA) ETF just formed a rare risky pattern

The SPDR Dow Jones Industrial Average (DIA) ETF continued rising and neared its all-time high as the recent bull run gained steam. The fund was trading at $411 on Friday, near its record high of $413 and 30% above its lowest point in 2023.

Dovish Federal Reserve

The main reason for the DIA ETF surge was the dovish statement by Jerome Powell, the Federal Reserve chair, at the Jackson Hole Symposium. In it, he hinted that the Fed would likely start cutting interest rates in the September meeting. 

This view was in line with what most analysts were expecting after a series of weak economic numbers released recently. A report by S&P Global on Thursday showed that the manufacturing PMI remained below 45 in August.

A PMI reading of less than 50 is a sign that a sector is in a contraction mode. More recent data showed that the manufacturing and industrial production dropped during the most.

Most importantly, cracks are emerging in the labor market. The most recent non-farm payrolls (NFP) data showed that the unemployment rate rose to 4.3% in July as the economy added just 114,000 jobs. 

Worse, the Bureau of Labor Statistics (BLS) revised its NFP reports through March downwards. The economy created 818k fewer jobs than reported in that period, making the case for interest rate cuts more urgent.

For a long time, the Fed has been focusing on inflation, which is a key part of its dual mandate. Now, it has started to focus more on the labor market, meaning that it may deliver three cuts this year. 

Cutting interest rates helps to stimulate the economy and push more people to the labor market. 

Implication on the stock market

Interest rates have an impact on the stock market because of how investors allocate money. In theory, they pack their money in bonds when rates rise and rotate back to stocks when they start falling.

Recent data shows that investors have pumped over $6.1 trillion to low-cost money market funds to take advantage of higher interest rates. ETF inflows have continued even as hopes of Fed cuts rise. They added over $90 billion in these funds in the first half of August. 

Therefore, the Dow Jones index has risen as investors anticipate more cash from money market funds this year.

The other main reason for this growth is the money held by private equity companies. Data shows that these funds hold over $3.9 billion in dry powder. Some of these cash will likely be deployed when rates start falling and when there is political clarity in the US.

The hope is that these companies will engineer or spur merger and acquisition (M&A) deals, which could push stock prices higher. 

At the same time, American companies have reported strong financial results this year, with earnings growth coming in at 10.9%, the fastest rate since 2021. More companies have also provided strong forward guidance, which could push stocks higher.

Salesforce earnings ahead

The next important catalyst for the Dow Jones will be next week’s earnings by Salesforce, one of the top tech companies in the index.

Salesforce has lagged the market and is barely moved this year as concerns about growth and its investment in artificial intelligence rise. Analysts have also turned bearish on the stock, with 28 of them revising its EPS estimate downward in the last three months. 

The average estimate is that its revenue will be $9.23 billion, up from the $9.13 billion it made last quarter. It made $8.6 billion in the same quarter last year.

The DIA ETF has lagged the S&P 500 and Nasdaq 100 indices this year as some of its core companies have retreated. Boeing’s stock has dropped by over 32% this year while Intel is down by 60%. Nike has also fallen by 22%.

The top gainers in the fund are American Express, Goldman Sachs, JPMorgan, and 3M, which have all jumped by over 30%.

DIA ETF analysis

Turning to the daily chart, we see that the DIA ETF has been in a strong momentum after bottoming at $384 earlier this month.

This recovery has pushed it above the 50-day and 200-day Exponential Moving Averages (EMA), a sign that bulls are in control. 

However, as I wrote on the S&P 500 index on Friday, it has also formed a double-top pattern, a popular bearish sign. Therefore, there is a risk that the index will suffer a harsh reversal in the coming weeks.

This performance is known as buying the rumor and selling the news. Ideally, traders bought the rate cuts hype and may now start to take profits when the cuts start.