3 Big Reasons Why The Dow Jones Industrial Average Is Priming For A Pullback

3 Big Reasons Why The Dow Jones Industrial Average Is Priming For A Pullback

The Dow Jones Industrial stocks (DIA) have barely budged this year even with so many stocks cratering in the stock carnage of 2022. Look for the mighty Dow to eventually fall fast as 2023 begins.



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Stocks certainly rebounded strongly from their October lows. NASDAQ 100 (QQQ) is now up just over 12% from the October lows. S&P 500 (SPY) added on almost 15% in the same time frame. The Dow Jones Industrials (DIA) has been the star performer, gaining nearly 18% in the past two months. Low interest rates and decent earnings have certainly fueled the recent rally. Stocks will have difficulty gaining ground now that earnings season is over and rates are at a level. This is especially true for the Dow 30 stocks which have gotten too far ahead of themselves on a comparative and actual basis. Plus, the Dow is about to enter a seasonally bearish period as 2023 starts. Traders and investors who are looking to short stocks might want to consider DIA because of the three reasons.

Comparatives

The Dow Jones Industrials (DIA) have undoubtedly been the best performing of the three major indices so far in 2022. DIA is down just under 4% year-to-date while the S&P 500 (SPY) has lost over 14% and the NASDAQ 100 (QQQ) dropped nearly 29% this year. The overall performance gap is widened if you consider the higher dividend yield of DIA compared to SPY or QQQ. Normally, these three indices move in unison. Or they may be more closely correlated than you would like to use a fancy term. Look for both the SPY and QQQ to be relative out-performers, and the DIA the weakest of the three, in ’23 to close this performance gap back to a more traditional relationship.

The Dow Jones has gotten somewhat cheaper from a P/E valuation perspective. The current P/E stands at just under 21 today versus just over 22 a year ago, or a drop of roughly 5%.

Compare that relative drop to similar metrics on both the S&P 500 and NASDAQ 100. Both indices have seen their current valuations fall by well over 30% on a P/E basis. SPY now trades at a significantly lower multiple of P/E than DIA. 12 months ago SPY was trading at almost a 7 point premium to DIA.

Technicals

DIA is once again hit overbought readings on the chart that have corresponded with tops in the past. Shares are hovering around 70 on a 9-day RSI basis. Bollinger Percent B breached 100 but has since softened. MACD reached an extreme, but is now poised to turn negative and generate a sell signal. DIA is trading at a big premium to the 20-day moving average and has stalled out at $340 overhead resistance once again. A pullback towards the $328 area to test the 20-day moving average seems the most likely course.

Seasonality

The calendar suggests the Dow will start to slowdown as the New Year approaches. January has been the worst performing month over the past 20 years with gains less than half of the time and an average loss of -0.70%. While December has been a good month, November is a better month.

Stock traders looking to position for a weak start to 2023 may want to consider shorting DIA near the end of 2022. Option traders may choose to trade a bearish calendar spread by buying January puts and then hedging by selling December put to position for a pullback in January, but possibly further consolidation in December. This is especially true given that implied volatility (IV) has fallen to comparatively cheap levels at just 31%, especially versus historic volatility of twice that at 62%.

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All the Best!

Tim Biggam

Editor, POWR Options Newsletter


shares closed at $396. 03 on Friday, up $1. 79 ( 0.45%). Year-to-date, has declined -15. 65%, versus a % rise in the benchmark S&P 500 index during 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 a Market Maker for First Options in Chicago. He is a regular contributor to the TD Ameritrade Network’s “Morning Trade Live” and makes frequent appearances on Bloomberg TV. His passion is to make the complex world easier to understand and more useful for everyday traders.

Tim is the editor of the POWR Options newsletter. Learn more about Tim’s background, along with links to his most recent articles.

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