Dow Jones Tests Key Support as “Buffett Indicator” Flashes Red

The Dow Jones grisly plunge accelerated today as investors continued to worry about the rising coronavirus cases in the United States. As the index dropped, it moved below a key support as I will explain below. Also, I will mention about the warning being sent by the “Buffett indicator.”.

US coronavirus cases jump

The Dow Jones is dropping for the second straight day as investors continue to worry about the pandemic. The number of new cases in the United States rose by 38,000 on Tuesday, which is a record number. This was after the numbers rose by more than 31,000 a day before.

The risk for the Dow Jones and the overall stocks in the United States is that the new cases will lead to more lockdowns. And it is happening. Consider Walt Disney, a major Dow component, which was denied permission to reopen its park in California. Analysts fear that this trend will continue in more states if the cases continues to rise.

Dow Jones falls ahead of bank stress tests

The Dow index is also falling ahead of the results of banks stress test. This is a test carried out by the Federal Reserve in its bid to see how healthy the banks are. The tests, which started after the past financial crisis, have played a role in ensuring that the country’s banks are strong. Weak results could have a major implication to banks and the Dow Jones.

For example, the Fed could recommend that banks halt paying dividends in a bid to save money. Indeed, banks have been among the worst performers this year. JP Morgan, Bank of America, Citi, and Goldman Sachs have dropped by between 11% and 30% this year.

“Buffett indicator” sends a warning

Meanwhile, the Dow Jones is falling even as a popular “Buffett indicator” sends a warning about corporate valuations. The indicator, which measures the ratio of corporate market capitalisation to the US GDP has risen to 144%, which is the highest it has been on record. This is because the total market cap of all listed companies is at $31 trillion, which is more than 140% higher than the GDP.

This indicator is named after Warren Buffett, who argued that the total market cap of stocks relative to US GDP was “probably the best single measure to measure where valuations are.”

Download our Q2 Market Global Market Outlook

Dow Jones technical analysis

On the daily chart, the Dow Jones dropped to a low of $25,138, which is the lowest it has been since June 15. The price is now at an important point. As you can see, the Dow is along the 50-day and 100-day exponential moving averages. Most importantly, the index is stuck at the 61.8% Fibonacci retracement level.

Also, the price is along the ascending trendline shown in pink. Therefore, a break below this level will imply that bears have prevailed. This will see them attempt to test the next support at $24,533.

Alternatively, a move above the $26,000 resistance will invalidate this prediction because it will signal that there are more bears in the market.

Don’t miss a beat! Follow us on Telegram and Twitter.

More content