Danger Lurks for Dow ETF

ETF Trends

The SPDR Dow Jones Industrial Average ETF (DIA) is up 7.6% over the past six months and resides just below its recently set all-time high, but there could be trouble for DIA and the blue chip index below that glossy exterior.

Some the Dow’s and therefore DIA’s largest biggest names are showing technical weakness. Over the past week United Technologies (UTX) has tumbled almost 4% with the pain accelerating this week in the wake of a weak second-quarter earnings report. That despite the fact that the company raised its full-year guidance.

Insurance giant Travelers (TRV) is off 2.4% in the past week and “had already stalled and was trading sideways in a range with deteriorating technicals such as momentum and volume. When it jumped down Tuesday after reporting disappointing earnings, it left a gap, or void, on the chart where no trading took place. It was an explosive change, and it was bearish,” reports Michael Kahn for Barron’s.

The Dow is a price-weighted index, meaning high price tag stocks account for higher percentage of the index and DIA. United Technologies and Travelers combine for about 7.6% of the ETF’s weight. Not a big percentage, but as Kahn notes, issues with those stocks could be just the tip of the iceberg. [Broad Market ETF Ideas]

Coca-Cola (KO) “which scored a rather substantial upside breakout last month, also gapped down. It is now trading below its former breakout level, which is not a good turn of events. Technical analysts call it a breakout failure,” according to Kahn.

In addition to Coca-Cola, General Electric (GE), McDonald’s (MCD), Merck (MRK) and Johnson & Johnson (JNJ) have broken down. That is problematic for DIA not just because those stocks combine for about 12% of the ETF’s weight, but also because just eight Dow stocks are up at least 10% this year, two of which are J&J and Merck. [Health Care ETFs Look Healthy]

And we have not even gotten to Boeing (BA), which has plunged 8.4% since June 2. Then there is Caterpillar (CAT). The world’s largest construction equipment maker fell 3.1% on volume that was more than double the daily average Thursday, violating its 50-day moving average in the process, after issuing weak guidance.

Boeing and Caterpillar combine for almost 9% of DIA’s weight.

SPDR Dow Jones Industrial Average ETF

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Tom Lydon’s clients own share of Coca-Cola and General Electric.

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