Dow Jones Industrial Average (DJIA) (NEUTRAL)

• All three major US indices reached record highs last week, driven by fresh inflation data and expectations of future interest rate cuts. The 10-year U.S. Treasury bond yield fell to 4.42% from 4.69% at the end of April, following a better-than-expected inflation report. The DJIA closed above 40,000 for the first time, ending at 40,003.6 (+1.2%) and marking its fifth consecutive positive week. The S&P 500 and NASDAQ, meanwhile, also rose, to 5,303.26 (+1.5%) and 16,685.97 (+2.1%), respectively.

• This week, the key focus will be on Nvidia's earnings report due on Wednesday afternoon. As the final mega cap to report for this season, Nvidia's results are highly anticipated. So far, mega caps have driven most of the S&P 500's earnings gains, and strong cloud results from Microsoft and Amazon are indicating increasing AI chip demand. On the economic front, Wednesday's FOMC minutes will be pivotal. The CME FedWatch Tool shows a 9% chance of a 25-basis point rate cut in June, 30% in July, and 68% for at least one rate cut by September.

• Technically, the DJIA has maintained its uptrend, closing above its 5-week SMA and reaching another record high last week. The bullish outlook remains intact, supported by continued uptrends in weekly stochastic and RSI indicators. However, the SmartMCDX indicator suggests a potential shift. This indicator, which measures buyers (bankers) activity based on volume and price movement, has approached the 15 threshold, indicating that buyer activity may be exhausting. This increases the risk of a short-term market reversal from its uptrend.

• In short, we expect the market to trade sideways with a mild downside bias early in the week, ahead of Nvidia’s earnings and the FOMC minutes. Any disappointments could lead to the index testing its immediate 5-week SMA support level at 38,987 and the crucial 13-week SMA at 38,061 if broken. Conversely, surpassing the all-time high at 40,051 would drive the index to test the next resistance level at 40,257.

Source: Kenanga Research - 20 May 2024