3 reasons why the Dow Jones index is surging for the wrong reasons

The Dow Jones index is soaring today as the market digest various data points. The index together with the S&P 500 and Nasdaq is up by more than 1% in the futures market.

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Why the Dow Jones is surging

There are several reasons why the Dow Jones index is soaring today. First, the price of crude oil is rising, with Brent up by more than 7.68% while the WTI is up by more than 10%. Higher oil prices are usually beneficial for the Dow because they reduce chances of bankruptcies in the energy sector. They also boost ExxonMobil and Chevron, which are components of the index. As a result, the share prices of the two companies are up by more than 2% in the premarket.

Second, the Dow Jones is up because tensions between the US and China are easing – for now. In statement to the media, several senior White House officials said that the Trump administration would not punish China for the virus. The comments were made by Matthew Pottinger and Steven Mnuchin. Meanwhile, Beijing has criticised the US for its comments and for letting the virus spread rapidly. In an editorial, Global Times said that Mike Pompeo was betraying Christianity with lies. The piece said:

“Lies are usually driven by interests. Pompeo aims to kill two birds with one stone by spewing falsehoods. First, he hopes to help Trump win reelection this November, which affects his interests. Second, Pompeo hates socialist China and, in particular, cannot accept China’s rise. He hence launched a propaganda campaign to ruin China’s image. “

Third, the Dow Jones is rising because American states have started to reopen their economies. Most importantly, New York and California have started preparing on how and when they will open. Other states like Texas and Ohio have already started to reopen. California governor, Gavin Newson sent the following tweet.

Finally, the Dow Jones is rising because analysts are predicting that the economic situation has bottomed. An analyst at Goldman Sachs told CNBC that the recently-released data were probably the worst.

Dow Jones risks are rising

Contrary to these reasons, the reality is that the US is not out of the woods yet. For one, the country has not yet solved the coronavirus crisis. According to the New York Times, the Trump administration is warning that the number of fatalities could double from the current 68,000. Also, analysts are warning that reopening an economy without enough testing risks thousands of lives. Therefore, the likelihood of a second wave is high.

Second, corporate earnings have been weak. According to Factset, with about 65% of companies, earnings declined by more than 13.7% in the first quarter. This is the worst year-over-year decline in earnings since the financial crisis. All this is happening at a time when stocks are overvalued. According to Factset, the forward 12-month PE ratio of stocks is 20.3, which is above the 5-year average.

Third, even with the assurance, it is too early to rule out the Chinese-US trade conflict. While the officials have said that the US would not punish China, Trump himself has not ruled it out.

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Dow Jones technical outlook

On the daily chart, we see that the Dow Jones has been on an upward trend since March this year. During this climb, the index has made several pullbacks. Also, the index has struggled to move above the 50% Fibonacci retracement and 100-day EMA level at $25,075.

Therefore, it is still too early to say whether the index will move above this resistance. If it does, it will send a signal that there are more buyers than sellers in the market. On the other hand, a move below $22,300 (38.2% retracement) will be the start of a new bear rally.

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