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Will Dow Gather Pace on the Latest 'Golden Cross' Formation?

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Wall Street's new bull market that started in mid-April, ending the coronavirus-induced short bear-market, has maintained its momentum so far. After rallying in the last four consecutive months, the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — are likely to finish the first week of August on a positive note.

However, comparing these three large-cap-centric indexes, the Dow is significantly lagging its peers. Nevertheless, a 'golden cross' was formed in the Dow Jones Industrial Average on Aug 6. Let's discuss whether the blue-chip index is poised for a momentum.

Golden Cross and Its Implication

When the 50-day moving average line of any asset crosses the 200-day moving average line from below, a golden cross is formed. In financial literature, the 50-day moving average line is generally recognized as the short-term trend setter, while the 200-day moving average is considered a long-term trend setter.

It is widely believed in the technical analysis space that whenever the 50-day moving average line surges ahead of the 200-day moving average line, a rally for the asset becomes a strong possibility. Although, a golden cross is not a sacrosanct, most of the time, a rally takes place for the asset.

On Aug 6, the 50-day and 200-day moving averages of the Dow were at 26,254.47 and 26,230.69, respectively. This is the first golden cross formation for the blue-chip index since Mar 20. The last golden cross for the Dow was formed on Mar 19, 2019 and the rally continued for a year until a 'death cross' (opposite of golden cross) was formed at the onset of the coronavirus pandemic.

Notably, the last golden cross for the market's benchmark — the S&P 500 — was formed on Jul 10, 2020. Since then, the index has gained 5.3% till Aug 6.

Dow Lags Its Peers

The Dow ended Aug 6 at 27,386.98, marking its sixth closing above 27,000 since Feb 25.  The index is yet to appreciate 4% to become green year to date. On the other hand, the broad-market S&P 500 is in positive territory with 3.7% return while the tech-heavy Nasdaq Composite has already skyrocketed 23.8% year to date.

All the three key indexes were at their lowest levels last on Mar 23. Since then, the Nasdaq Composite, the S&P 500 and the Dow have rallied nearly 62%, 50% and 47%, respectively.

On Aug 6, the Nasdaq Composite posted its first-ever closing above a landmark 11,000, reflecting its 32nd all-time high so far this year. The S&P 500 is 1.1% away from its all-time high recorded on Feb 19 while the Dow still needs to make up 7.3% to surpass its all-time high recorded on Feb 12.

Near-Term Positives for Dow

The primary reason for the Dow lagging its peers is the weight of technology stocks within the indexes. The technology sector was the main driver of Wall Street's rally in the last four months. The technology stocks consist of more than 50% and more than 25% of the aggregate weights of the Nasdaq Composite and the S&P 500, respectively. However, the Dow doesn't have much concentration on the technology sector.

Meanwhile, a series of economic data for May and June like job market, housing market, vehicle sales, retail sales, manufacturing, services and consumer confidence indicated that the pandemic-led economic devastations were not as severe as expected earlier. Unprecedented fiscal and monetary stimulus provided by the U.S. government and the Fed generated huge pent-up demand and helped the economy to remain stable.

Despite the second wave of COVID-19 since mid-June, the three economic data for July that were released, namely manufacturing, services and vehicles sales, are highly encouraging. This indicates that the U.S. economy will gradually return to the pre-pandemic level as more parts of it reopen. Finally, a second trench of fiscal stimulus of more than $1 trillion, which is expected to be injected by next week, will bolster the U.S. economy.

We believe these positives will set gains in motion for stocks from cyclical sectors such as industrials, financials, materials and consumer discretionary.

Stocks to Watch

As of Aug 6, only nine components of the 30-stock Dow Index provided positive returns year to date. These are: Apple Inc. (AAPL - Free Report) , Microsoft Corp. (MSFT - Free Report) , The Home Depot Inc. (HD - Free Report) , Walmart Inc. (WMT - Free Report) , UnitedHealth Group Inc. (UNH - Free Report) , The Procter & Gamble Co. (PG - Free Report) , Visa Inc. (V - Free Report) , McDonald's Corp. (MCD - Free Report) and Johnson & Johnson (JNJ - Free Report) with returns of 55.2%, 37.2%, 23.4%, 8.9%, 6.8%, 6.3%, 5.8%, 2.8% and 1.2%, respectively.

Except Walmart, all the other stocks carry either a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of the above-mentioned nine stocks year to date.

 

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