Dow Jones on the 21,000 level

This week has been an intense week regarding economical statistics: growth, inflation, PMI, etc. Donald Trump addressed his first speech in front of the Congress since he has been elected, adapting a more neutral tone, but he didn’t give any specific details about how he plans on financing his proposals: infrastructure investment plan, tax cuts, etc. Investors are betting on a rate hike in the U.S. next in March, which pushes the dollar and American indices higher.

The Dollar Index exited the Ichimoku cloud two days ago. The Ichimoku indicator allows you to visualise support and resistance levels, to identify current and future trend direction, to gauge momentum and to see buying and selling signals. You can consider this indicator to be a comprehensive analysis system all by itself, as it gives you all the necessary information required to make trading decisions.

Prices are above the cloud, the Tenkan , and the Kijun , while the Lagging Span  is also above everything and it has no obstacle to keep rising – which is good news for the Dollar Index, which should keep rising.

As we all know, a strong Dollar hurts American export-oriented companies, as their product will be more expensive abroad and thus affect their sales numbers. If American products are more expensive abroad, consumers could decide to turn to other (non-American) products, which are less expensive. If those American companies have fewer sales, they might then choose to hire less (or fire more) people to compensate.

Most of the companies you can find on the S&P500 index generate more than 40% of their revenue abroad, thanks to foreign sales. Trump, naturally, is a very business-oriented president who wants to improve American competitiveness, especially in countries like China, but a strong Dollar doesn’t help.

Let’s not forget of course that a strong Dollar is a positive sign that investors have confidence in that currency and the American growth outlook. Consequently, the Dollar has been rallying since his election with his policies of tax cuts, fewer regulations and increasing government spending.

We usually say that when a Central Bank increases interest rates, the currency of the country increases in value. This is true in some ways, as more investors are investing in that country to get better returns. But if you look at what has happened after recent rate hikes in the US, the American Dollar actually went down. Most traders are expecting a March rate hike.

Since Trump’s election, American indexes have been rallying. The momentum of record smashing has been supported by Trump’s policies regarding infrastructure investments, less regulations and tax cuts. One has to wonder if the rally can keep going, given the recent uncertainty on the world stage. The Dow Jones bursting through the 21,000 level, does it really matter for investors?

The Dow Jones was established in 1896 and is based on 30 stocks, including Goldman Sachs, Disney, McDonald’s and Microsoft. The problem is that we cannot calculate total returns with this index, as it is based on stock prices. This structure highly influences its value, as it includes several heavyweight companies. For this reason, some professionals consider that the technical level of 20,000 points doesn’t mean anything, as the construction of the index is unusual.

We would argue that the rise of the Dow Jones isn’t as significant as some traders believe. First, the benchmark only represents 30 companies out of thousands of stocks that are part of the American equity market. Secondly, the fact that any outsized movement in the value of its components will have a big effect on the Dow Jones, meaning that it isn’t an accurate reflection of the market at large.