DIA: Questionable Highs – SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA)

(Source: Author)

After hitting extreme depths on December 26th, 2018 (at $216.97), the SPDR Dow Jones Industrial Average Fund (DIA) has experienced a stunning rally and generated gains of 22.29% in the market periods which followed. But as an uneventful earnings season reaches its halfway mark, investors seem to be relying on “hope” to a degree that is simply unhealthy. Initial warnings for stock benchmarks developed when yield curve inversions became visible in the bond market, and clear problems are present in DIA core holdings. As a result, the combination of these factors could send DIA lower now that we have reached overbought levels.

(Source: ETFdb.com)

Looking at the recent market activity that has been directed toward the SPDR Dow Jones Industrial Average Fund, we should say that the level of buying that has occurred near the highs is quite surprising. Over the last month, DIA has benefited from inflows of $580.1 million. This puts DIA near the top of the averages for its fund category, so investors seem to be ignoring the fact that price metrics are wallowing in overbought territory. Relatively lackluster performances this earnings season do not seem to justify this investor activity, so the more likely explanation is that we are seeing exuberance and a “fear of missing out” rather than a conservative approach to long-term investing.

This market behavior in the last four weeks presents a sharp contrast to the longer-term averages that have become visible over the last six months and the last year. In the previous 26-week period, the SPDR Dow Jones Industrial Average Fund has been negatively impacted by extreme outflows of $858.2 million. Furthermore, this figure swells to $1,021.0 million when we assess DIA from the perspective of the investor activities undertaken over the last 52-week period. In both cases, DIA is holding near the bottom end of its category averages (second from the bottom, to be more exact).

So what we are seeing over the last four weeks is almost a mirror image of the foundational trends that define investor activity in the SPDR Dow Jones Industrial Average Fund. What is most disturbing here is the fact that these changes have become apparent as DIA approached its record price levels. Ultimately, this implies that many investors have committed to significant changes in bullish exposure while the ETF is trading near overbought valuations. Of course, this is not what we should be defining as a “rational” approach to long-term investment strategy.

(Source: ETF.com)

The excitement might be understandable if we saw more corporate earnings stories that reflected strength this seasons. Unfortunately, this does not appear to be an accurate understanding of what is actually occurring in the market. Manufacturing giant 3M Co. (MMM) represents an important example of a negative earnings story that disrupts the underlying bullish narrative. 3M makes up a substantial portion of the total holdings in the SPDR Dow Jones Industrial Average Fund (5.58%), and the company’s disappointing quarter is indicative of a slowdown in consumer economic conditions in critical markets that could continue to pressure margins and limit prospects for organic growth.

After the earnings report, 3M shares plunged by almost 13% in its worst single session performance since the Black Monday collapse of October 19th, 1987. For the quarter, 3M reported adjusted EPS of $2.23. This missed analyst expectations (EPS of $2.49) by 10.44%. Revenues came in at $7.863 billion, which missed analyst expectations (of $8.025 billion) by 2.02%. Negative reactions in 3M share prices were further driven by a reduction in guidance for 2019 earnings, and the company’s stated intentions to initiate extensive layoffs (expected to impact roughly 2,000 workers). Charges related to litigation events totalling $548 million (pretax) also weighed on 3M’s quarterly results.

But the deepest concerns in the report indicate increased potential for weakness in critical consumer markets. Asian markets generate 3M’s largest sales outside the United States, and the company’s sales figures in the region dropped by 7.4% during the quarter. Sales figures in Europe, Africa, and the Middle East fell by an even wider margin (with decrease of 9.4%). As a result of these declines, 3M has made downward guidance revisions which indicate adjusted earnings expectations of $9.25-9.75 per share for the full year period in 2019. These revisions are significant when compared to the company’s previous forecasts (which ranged from $10.45-10.90 in EPS for the period).

(Source: Author)

Prior to 3M’s first quarter earnings release, its 2019 share price performances had actually outperformed the SPDR Dow Jones Industrial Average Fund. Immediately following the release, the resulting stock plunge erased almost $13 billion in 3M’s market capitalization. MMM is now higher by just 0.59% for the year and 8.36% higher since reaching the December 26th, 2018 lows. In comparison, DIA is up 22.29% for the same period and this disconnect broadens the possibility for extended declines in the ETF. Initial warnings for stock benchmarks developed when yield curve inversions became visible in the bond market, but the pundits seem to be focusing on corporate earnings beats in order to justify these questionable highs. Clear problems are present in DIA core holdings, so these optimistic opinions may be misleading for bullish investors. As a result, these combined factors could send DIA lower now that we have reached overbought levels.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.