Dow clings on to 23,000 as Q3'17 earnings surprise

An insight into the Dow components leading the Index higher and the near- term outlook...


It took the Dow, the second oldest Index in the US after the Dow Jones Transportation Average, 54 trading sessions to cross over from the 22000 milestone to smash another record as it settled above the 23000 mark to complete the best trading session in more than a month. The 160- point gain in the Index was led by a 9 percent rally in IBM on the back of better than expected Q3 2017 results although the tech giant which accounts for a weightage of nearly 5 percent in the 30- stocks that represent the DJIA has seen declining revenues for the 22nd quarter in a row. To add to the celebration, the record shattering event took place on the eve of the 30th anniversary of one of the most unforgettable days in the history of the US stock markets- Black Monday or the crash of 19th October 1987 when the Dow Jones Industrial Average witnessed the worst day in its history after plunging about 23 percent in a single session.

The Dow Jones Industrial Average was created by Charles Dow, the co- founder of Dow Jones and Company and was first introduced in May 1896. The Index is currently owned and operated by S&P Dow Jones Indices, a subsidiary of S&P Global and is a price- weightage average of 30- large publicly owned companies with Boeing leading the pack. Year to date, the DJIA has rallied about 17 percent with 13 out of 30 companies outperforming the broader Index, 13 delivering positive returns but underperforming the benchmark and the remaining 4 companies carrying negative returns.

Coming to stock specific performance of the Dow components in 2017, Boeing has been the outperformer by far, rallying close to 67 percent on the back of global uncertainty leading to massive increase in defence spending in the US. Over the last five years, the company’s shares have spiked by close to 200 percent with analysts expecting prices to rise further in the near to medium term as rising tensions with North Korea and the uncertainty in the Middle East is driving the country to raise its armoury production. Currently priced at around $260, Boeing is valued at more than $150 billion with a P/E of 22.70.

Caterpillar comes in next in terms of YTD performance with the company’s shares rising about 41 percent for the year. Currently trading above $130, the share prices of the construction and mining major have more than doubled since falling to $56 in January 2016.

Global economic recovery, a weaker dollar and the likely passage of a trillion dollar infrastructure package in the US has led to the stupendous performance of the company. The company also raised its guidance for 2017 following its Q2’17 earnings and was upgraded by UBS last month. The other companies that have outperformed the Dow include McDonalds, Visa, Apple Inc., United Health, Home Depot, Coco Cola, Walmart, American Express, J&J, Microsoft and 3M. The worst performer among the Index companies is General Electric with share prices sliding more than 28 percent this year alone. 

The iconic company once considered the go to stock among investors for the high dividend pay-outs has been struggling for close to two decades on the back of a sharp fall in oil prices, high capital expenditure following some of its earlier acquisitions, investments in some of its own subsidiaries in addition to the fallout of the European debt crisis. The company’s share prices have dropped almost a third after scaling peaks of $60 in 2000. To add to the woes, the company missed its Q3’17 forecast with adjusted profits coming in at 29 cents a share, far lower than the 49 cents expected by analysts, forcing to company to cut its full year guidance to $1.05- 1.10 from $1.60- 1.70 and scale down its revenues by half to $7 billion from $12- 14 billion forecast earlier.

With the Q3 earnings season underway, companies including Verizon, IBM and American Express have already reported earnings that are either in line or above market expectations with GE being the lone exception for now. With interest rates near all- time lows and corporate earnings continuing to grow, this liquidity driven rally looks to extend its winning streak at-least in the near- term. 


Technical Outlook- 

The Index settled at 23,328.63 on Friday, breaking out of near- term resistances at 23,250 with ease. Dow could now face resistances at 23,350 and a close above could see the Index rally to 24,000- 24,100 very quickly.

Supports are placed in the 23,000- 23,250 zone, offering short- term traders the opportunity to go long. However, a close below 22950 could lead to fresh selling with the Index likely to slide to 22,300- 22,700.     

Long opportunities- 

At the break of 23,400 with stops at 23,300 for targets of 24,000.

At 23,000 with stops at 22,950 for targets of 23,250.

Short opportunities-

At the break of 22,950 with stops at 23,050 for targets of 22,700- 750.

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