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Can Dow Breach 22,000 and Drive ETFs Higher?

Sanghamitra Saha
CWCO vs. GWRS: Which Stock Is the Better Value Option?

The sun is shining again on Wall Street after a stormy week. The S&P 500 made a new record and the Dow Jones Industrial Average returned to 22000 for the first time in about a month. The two troubling factors — North Korea’s missile launch and hurricanes — finally lost fervor (read: High-Momentum and Beta ETFs to Play on Fading Fears?).

Irma Not As Harsh As Expected

Hurricane Irma lashed out on Florida weaker than anticipated and fears of huge devastation ebbed a little. Miami did not directly face the storm, which lost some strength and changed its expected route, as per Wall Street Journal. In fact, several insurance companies’ shares started to move up this week, probably expecting less severe losses (read: Irma Aftermath Puts These ETF Areas in Focus).

Activity Gains on Long Term

Investors should also note that New York Fed President William Dudley told CNBC that Hurricanes Harvey and Irma are likely to boost economic activity in the long term as purchases and the need for remodeling will be higher. All these activity gains are likely to boost Dow Jones stocks.

Oil to Rally Ahead?

As we all know, Harvey thumped U.S. refineries causing their utilization rates to fall to 79.7% of total capacity, the lowest since 2010. Though lower demand from refineries hurt crude prices, gradually refineries will return to operation and then crude prices will likely see an upturn.

In addition, the word is that Saudi will reduce allocations by 0.35 mbpd in October. Iraq has also pointed at “better compliance” on output cut. If all goes well, oil prices may be up for gains in the coming days.

It has been noticed lately that Dow Jones shares a deep relationship with oil price movement. Though the energy sector rally spreads optimism over the broader market as a whole, in most cases, on a particular day of oil surge, the rise in the Dow Jones is steeper than that of the S&P 500, or vice versa.

Upswing in the Manufacturing Sector

Manufacturing numbers point to a recovery in the United States. An uptick in manufacturing numbers can act as a strong tailwind to Dow Jones Industrial Average’s forward growth, in our opinion. After all, Dow Jones-based ETF SPDR Dow Jones Industrial Average ETF Trust DIA invests about 20% weight — the highest allocation — in the industrial sector. And U.S. manufacturing activity came in at the strongest in six years in August (read: U.S. Manufacturing Hits Six-Year High: ETFs to Benefit).

How Long Will the Dow Rally Last?

The latest sell-off in the market made U.S. stocks reasonably valued. Plus, the above-mentioned factors should help the index to remain active. However, if there are no positive developments related to Trump’s pro-growth policies in the coming days or in the oil patch, the rally is likely to stall.

The relative strength index (RSI) of DIA is 62.61 now. The figure slid from 76.33 seen in early August, indicating sell-offs in the meantime. Investors should note that the current RSI shows that the fund is yet to enter the overbought territory and can thus gain ahead. Even if the gains are not huge, the index and the fund are likely to remain range-bound in the near term.

ETFs in Focus

Investors intending a momentum play can bet on DIA, Guggenheim Dow Jones Industrial Average Dividend ETF DJD and iShares Dow Jones US ETF IYY. Investors can also settle for leveraged Dow ETF plays as long as the trend favors them. Here, ProShares Ultra Dow30 DDM and ProShares UltraPro Dow30 UDOW are a couple of choices.

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SPDR-DJ IND AVG (DIA): ETF Research Reports
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PRO-ULT DOW30 (UDOW): ETF Research Reports
ISHARS-DJ US IF (IYY): ETF Research Reports
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