It’s been an absolutely wild week for markets, with the surprising drop in US CPI to 7.7% y/y driving the huge moves we saw yesterday. After the soft inflation reading, traders are pricing in an 80% chance of a downshift to a 50 basis point (bp) interest rate hike from the Federal Reserve and a lower terminal interest rate (back below 5%). This dovish shift has had an outsized impact on markets, with US treasury yields falling sharply (10-year back below 4% to a 1-month low), the US dollar falling across the board, gold rocketing to its highest level since August, and US indices surging.
It’s the last move that we want to highlight here: While the broader S&P 500 and Nasdaq 100 are rising by more on the day, the stalwart Dow Jones Industrial Average is showing by far the most strength over the last month of the major US indices. As the chart below shows, the US benchmark is on track to close at its highest level since late August and has little in the way of resistance until the May/August highs around 34,000:
Source: TradingView, StoneX
In the short term, a close near current levels would be a bullish sign for a continuation toward the key 34,000 zone as we move through this month. Looking out a bit further, it’s worth noting that the DJIA is trading down less than 10% from its record highs set at the start of the year. While it’s unlikely we see a rally large enough to take the index back into positive territory by New Year’s, there’s optimism that the worst of the selling may be behind us.
Technically speaking, both the 50- and 200-day EMAs are turning higher, so as long as the index can hold up near current levels, the longer-term trend may soon shift in favor of the bulls as we start to look ahead to 2023.