3 major reasons why the Dow Jones Industrial Average is poised for a pullback

3 major reasons why the Dow Jones Industrial Average is poised for a pullback

The Dow Jones Industrial stock (DIA) has barely budged this year, even with so many stocks collapsing in the stock carnage of 2022. Watch for the mighty Dow to eventually fall quickly as 2023 begins.



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Equities have certainly bounced back from their recent lows. NASDAQ 100 (QQQ) is now up just over 12% from its October lows. S&P 500 (SPY) added nearly 15% in the same time frame. The Dow Jones Industrials (DIA) was the best performer, gaining nearly 18% over the past two months.

Lower interest rates and not-so-terrible earnings certainly provided some fuel for the recent red-hot rally. With earnings season coming to a close and rates bottoming out, look for stocks that are struggling to gain ground from here. This is especially true of the Dow 30 stocks that are too far ahead on a comparative and factual basis. In addition, the Dow is about to enter a seasonal bearish period as 2023 begins. Traders and investors looking to short stocks would be wise to do so with DIA for the three reasons just mentioned.

Comparisons

The Dow Jones Industrials (DIA) has undoubtedly outperformed the three major indices so far in 2022. DIA is down just under 4% year-to-date, while the S&P 500 (SPY) is down more than 14% and the NASDAQ 100 (QQQ) fell nearly 29% this year. Take into account the higher dividend yield of the DIA versus SPY or QQQ and that overall performance difference widens slightly.

Normally these three indices tend to move together – or much more strongly correlated to use a nicer term. Look for both the SPY and QQQ as relative out-performers, and the DIA as the weakest of the three, in ’23 to close this performance gap back to a more traditional relationship.

The Dow Jones has become slightly cheaper from a P/E valuation standpoint. Current P/E stands at just under 21 today versus just over 22 a year ago, or down about 5%.

Compare that relative decline to similar metrics on both the S&P 500 and NASDAQ 100. Both indices have seen their current valuations drop more than 30% on a P/E basis. In fact, SPY is now trading at a significantly lower P/E multiple than DIA. 12 months ago, SPY was trading at a nearly 7-point premium to DIA.

Technical data

DIA again has overbought values ​​on the chart that matched past highs. Stocks hover around 70 on a 9-day RSI basis. Bollinger Percentage B passed 100, but has since softened. MACD came to the extreme but is about to turn negative and generate a sell signal. DIA is trading at a large premium to the 20-day moving average and has re-entered an overhead resistance of $340. A drop back to the $328 area to test the 20-day moving average seems the most likely course.

Seasonality

The calendar suggests that the Dow will begin to slow as the new year approaches. January was the worst performing month of the last 20 years with gains less than half the time and an average loss of -0.70%. November, on the other hand, was one of the best months, while December was just above average.

Stock traders looking to position themselves for a weak start to 2023 should consider shorting DIA towards the end of 2022.

Options traders might choose to put a bearish spread trade on the calendar by buying January puts and hedging by selling December puts into position for an eventual pullback in January, but perhaps for further consolidation in December. This is especially true given that implied volatility (IV) has fallen to relatively low levels of just 31%, especially when compared to historical volatility of twice that of 62%.

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All the best!

Tim Biggam

Editor, POWR Options Newsletter


shares closed Friday at $396.03, up $1.79 (+0.45%). Year-to-date, is down -15.65% versus a percentage increase in the benchmark S&P 500 index over the same period.


About the author: Tim Biggam

Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Lead Options Strategist at ThinkorSwim and 3 years as Market Maker for First Options in Chicago. He makes regular appearances on Bloomberg TV and is a weekly contributor to the TD Ameritrade Network “Morning Trade Live”. His main passion is to make the complex world of options more understandable and therefore more useful for the everyday trader. Tim is the editor of the POWR Options newsletter. Read more about Tim’s background, along with links to his most recent articles.

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