Market Overview

Here's Why Dow Jones ETFs Are Moving North


Dream days of Dow Jones are back again. The index has been hitting record highs in recent sessions and closed at 21,553.09 on July 13. The blue-chip index set out on an astounding rally since Trump's win. It crossed 19,000 for the first time in its 120-year history on November 22. And apart from some occasional dips on Trump's policy-related uncertainty there was no looking back. This year itself, the index hit 24 record highs.

Behind the Height

Overall, Trump's pledges of higher fiscal spending and tax cuts acted as the main tailwind. Specially, the industrial sector deserves a mention when it comes his plans of increased infrastructure spending. Though uncertainty related to the materialization of those policies sporadically thwarted the Dow rally, some success in implementing the travel ban and the introduction of a revised health-care bill in the Senate actually restored investors' confidence and re-energized the rally.

The most recent driver was a dovish Yellen testimony which hinted at a gradual rate hike. Signals of a few more months of cheap money inflows should prompt the rally. The central bank will probably start reducing its balance sheet later this year, but Yellen indicated that any acute economic crisis calling for a substantial rate cut would put trimming of balance sheet on hold (read: Dovish Yellen Testimony to Boost These ETFs).

Rise in banking shares ahead of earnings was another cause for the recent rally. The financial sector accounts for about 16.9% of SPDR Dow Jones Industrial Average ETF DIA with Goldman Sachs GS taking the top position with about 7.23% weight. Overall, the benchmark 10-year Treasury yield was 2.35% on July 13, up 2 bps from the day earlier. The rise in yields also benefited financial stocks.

Moreover, manufacturing numbers point to a recovery in the U.S. An upswing in the manufacturing sector can act as a strong tailwind to the Dow Jones Industrial Average's forward growth. After all, DIA invests about 20% weight – the highest allocation – in the industrial sector (read: Global Manufacturing in Growth Zone: ETFs to Watch).

How Long Will the Rally Last?

DIA now has a positive weighted alpha of 17.30 and volatility of 6.74%. Investors should note that a moderate but positive weighted alpha hints at more gains. So, investors are likely to realize moderate gains in the coming days, if the rally continues.  

Investors should also note that DIA is yet to enter the overvalued territory with a relative strength index of 63.66. Its short-term moving average is well above the medium-term and long-term averages as depicted by the 50-Day SMA and 200-Day SMA, respectively, in the chart below. This suggests continued bullishness for this ETF.

Other Dow Related ETF Options Than DIA

Investors can also settle on leveraged Dow ETF plays as long as the trend favors them. Two choices are ProShares Ultra Dow30 DDM and ProShares UltraPro Dow30 UDOW. All these Dow Jones related funds outperformed theS&P 500-based fund SPY in the last 10 days (as of July 13, 2017) (read: 10-Minute Guide to 10 Most Popular Leveraged ETFs).

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The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Dow Jones Industrial AverageNews Federal Reserve General


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