Dow Jones Report & TCI Trading Signal

• Asset: Dow Jones Industrial Average (DJIA)
• Period: September-October 2015

TCI Forecast: DJIA to complete its uptrend in September (↑) and start a new bear market in early October (↓)

Since July 20, 2015, the Dow Jones has dropped significantly, from 18,137 points to 16,102 points. Several factors may explain why investor sentiment shifted quickly from bullish to bearish. However, the main driver now seems to be fragile investor psychology rather than strong fundamental data. US equity markets have been rising for seven years straight since 2009, so a sharp correction might be due to bring valuations back to a more reasonable level.

Is the Dow Jones expensive today based on earnings? Let’s look at how the P/Es and dividend yields (%) of US markets stand after the August decline.

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Dow Jones, S&P 500, and Nasdaq Earnings Report

Here are the P/Es and dividend yields for the major US equity indices as of September 4, 2015.

P/E RATIO			DIVIDEND YIELD
	Today	One year ago	Today	One year ago
Dow Industrial	15.41	16.18	2.66%	2.20%
Dow Transportation	17.55	20.58	1.45%	1.10%
S&P 500	20.35	18.97	2.18%	1.91%
Nasdaq 100	21.35	23.55	1.29%	1.26%

+Today: September, 4th 2015

Source: WSJ Market Data Group

The P/Es of the US equity markets are lower than they were a year ago and should not be seen as expensive. However, in the past, P/Es have been 20-25% lower than current levels. Given fragile market sentiment, US market P/E ratios could drop significantly. The good news for investors is that, based on historical analysis, stock market valuations tend to return to their long-term averages. So, if US company earnings remain strong over time, stock prices should turn bullish again within a few months.

The Economic Turmoil in China

China is rapidly shifting from manufacturing to a service-based economy, and this transformation comes with costs. As Chinese manufacturing data falls, the Chinese stock market has been negatively affected. This impact has spread to emerging markets worldwide, hurting investor sentiment and crude oil prices. Still, the Chinese government is ready to support the economy and stock market. According to Reuters, Chinese officials announced personal income tax on dividends will be removed for shareholders who hold stocks for more than a year. China may still face challenges, but its vast resources mean any financial or economic crisis is unlikely to last more than 6-8 months.

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Dow Jones Technical Analysis and TCI Readings

As shown in the chart below, the Dow Jones Industrial has performed well over the past five years. After a rough August, the Dow now trades well below its 210-day Simple Moving Average (SMA). The upper chart shows the daily Dow Jones Industrial (DJIA) line, and the lower chart shows the Trading Center Indicator (TCI) for the Dow Jones.

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TCI on Dow Jones

On August 25, 2015, the TCI for the Dow Jones Industrial showed -15.69% (see TCI table below), which is a very low reading for a major equity index like the DJIA. As seen in the Dow chart above, this is the second-lowest TCI reading in the past five years. The lowest was on August 8, 2011, when TCI hit -17.31%. Back then, the Dow rose from 10,810 points in August to 12,303 points by late October 2011.

For 2015, the TCI suggests the Dow Jones could have 2-3 positive weeks to complete its current corrective rally.

Here are the TCI indications for the Dow Jones Industrial for September-October 2015 (use the slider below).

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Dow Jones Report -Final Words

Overall, the Dow Jones Industrial Average is expected to bounce back from its current level of 16,100 points and possibly form a short-term uptrend. However, be aware that the coming months may be challenging for global equity markets. I recommend holding 50% of your portfolio in cash. Staying in cash now means you'll be ready to take advantage of good investment opportunities when they arise.

 

■ Dow Jones Report (Dow Jones Industrial 2015)

TradingCenter (2015)

George M. Protonotarios, Financial Analyst, » George at Linkedin