The Dow Jones Index Upbeat, But Will It Hold Above 40K Points?

Summary:
• The Dow Jones Index hit a historic 40,000 points mark on Friday, but the divergence between the US economy and the stock market is a concern.

The Dow Jones Index is upbeat after reaching the historic 40,000 points milestone, and investors’ confidence is surging on the growing likelihood of interest rate cuts by the Fed. The Index was at 40041.96 in the pre-market session on Monday, after inching up by 0.09 percent.  At the current mark, the Dow is up by about 6% this year, and its recent rally is a divergence from the US economy.

While the US stock markets are rising steadily, the US economy is struggling. The US economy is signaling slower growth rate, with reduced consumer spending and a contracting labour market in which the unemployment rate stands at 3.9 percent. According to the Bureau of Labor and Statistics, inflation rate declined slightly to 0.3 percent in April, much as its annualized equivalent still stood at 3.4 percent- significantly higher than the target 2 percent.

Meanwhile, despite the cooling labour market, signaled by the decline in last month’s NFP numbers, and the latest Initial Jobless claims filings, the silver lining to it is that the trend could help reduce the rate of inflation. However, the downside to that is the likelihood of reduced consumer spending, which could weigh down on the economy.   The pressure on the US economy could push the Fed to consider interest rate cuts in the second half of the year, thereby boosting investor confidence.

As of this writing, the top Dow component stocks sent mixed signals in the premarket, indicating that the psychological level of 40,000 points could come under threat.  Microsoft stock price was down by 0.19 percent in the premarket trading, while Visa was relatively flat, with the share price  at 280.10.  However, Caterpillar was up by 1.58 percent to $256.27 per share, American Express at +0.62 percent while Salesforce was up by 0.33 percent.

Technical analysis

The Dow Jones Index pivots at 39853, and the bulls are currently in control. I expect resistance at 40,080 in the near term. However, a break above that mark could open up the pathway to head higher to test 40,200. On the other hand, a move below 39853 will signal control by the sellers. In that case, the first support will likely be at 39,590, but a break below that mark could result in further downside to test 39,394.