Dow Jones shines but ARKK crumbles as value-growth divide widens
DOW JONES OUTLOOK:
- Dow (DJI) wins for second day in a row, closes on new record
- The rA high interest rate environment could hurt the growth and technology segment of the market in the near term, leaving ARK Innovation in a very precarious situation
- Value stocks, with strong balance sheets and positive earnings outlook, set to strengthen in early 2022
Most read: S&P 500, Nasdaq Forecast – Yields Jump But Bulls Are Not Discouraged
The Dow Jones (DJI) topped major Wall Street averages on Tuesday, Gaining 0.6% to end the session ata historical record of 36,799, as investors began to move away from expensive tech and growth stocks and shifted towards sectors that are less sensitive to rising interest rates and more leverage to reopen the economy.
Government returns accelerated higherrecently on expectations this Federal Reserve to aggressively withdraw stimulus In the coming months to counter searing inflation, which peaked in four decades of 6.8% year-on-year in November. In this context, the Treasury the curve has shifted upwards, the 10-year rate at the top 1seven basis points at 1.6seven% in the last two days only, its highest level since November 24.
The recent dynamics of the bond market seem to encourage investors to abandon speculative and long-term games in favor of quality investments. Nowhere was this clearer on Tuesday than in ARK Innovation’s performance (ARKK), Cathie Wood’s flagship ETF. This growth-oriented fund, made up of companies with fragile balance sheets, low cash flow, and modest or nonexistent benefits, had his worst day since early December, plunging more than 4% at the closing bell.
Going forward, the normalization of monetary policy is expected to fuel volatility in all asset classes and become an obstacle for technology and growth stocks, especially those that raised multiple benefit courses. In general, a higher rate diet is generally damaging to the growth factor for two reasons. First, he lift up financing costs for companies that burn money and rely heavily on cheap credit to expand their businesses. Second, he undermines valuations by increasing the discount rate for future cash flows. Based on these local, ARKK could continue to retreat and become an outcast of the market Short term, as I explained in my best business idea for the first quarter.
Although the less accommodating environment, associated with intrusive inflationary pressures, can create a stimulating backdrop For the entire equity market at the start of 2022, there are still good opportunities, especially in the value segment. Once recovery stabilizes after omicron fear, companies with less leverage and solid balance sheets, strong pricing power, low exposure to wage inflation and a strong earnings outlook should stand out. This leaves the Blue-chip Dow Jones well positioned to outperform the S&P 500 and Nasdaq 100 in the coming months (and ARKK of course).
The constructive outlook for the Dow Jones, however, rests on one assumption: the recovery must movement full steam ahead. As economic activity slows after several exceptional quarters, GDP is expected to rise further beyond its long-term potential. Historical playbook suggests that above-trend growth tends to be very positive for value stocks.
With Eis in mind, traders should carefully monitor entries economic data to assess the strength of the US economy and ensure that the investment thesis remains intact. That said, the schedule is busy this week, but attention should be paid to the ISM service survey. to go out Thursday, but moD important, december Non-farm payroll (NFP) report of the Friday. If the service sector and labor market remain healthy, the Dow has room to reach new highs in the days / weeks to come.
DOW JONES TECHNICAL ANALYSIS
The Dow Jones jumped to a record 36,935 on Tuesday, but quickly swung down, unable to break channel resistance. If sellers regain control of the market, support appears in the 36,550 area, but a pullback below this floor could start the bullish sentiment and pave the way for a move towards the 36,200. On the other hand, if the bulls manage to push the index up and break above the 36,935 / 37,000 high, we will be in uncharted territory, but the psychological level of 38,000 may become the near term bullish target.
TECHNICAL CHART OF THE DOW JONES INDUSTRIAL AVERAGE
Dow Jones chart prepared in TradingView
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— Written by Diego Colman, contributor