Dow industrials will rising yields and geopolitics spell doom – spdr dow jones industrial average etf (nysearca dia) seeking alpha gastritis


This latest earnings season has moved forward in a most impressive fashion, and this has helped investors rationalize some of the concerns attached to the Dow Jones flash crash activity that began in early February 2018. But there are still real questions with respect to whether or not these flash crashes were the beginning of something larger. Might we still be in store for a much bigger collapse in the stock benchmarks? Rising geopolitical tensions and U.S. Treasury yields moving above 3% suggest that there could be some headway before we are able to see another run higher in the SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA). We are bearish on DIA, but will continue to monitor key developments in the energy sector as a means for identifying new strategies in our exposure to the ETF.

Over the past five years, those bullish on DIA have been rewarded handsomely, as the ETF has posted capital gains of 62.66% for the period. But this has been relatively weak compared to instruments like the PowerShares QQQ Trust ETF (NASDAQ: QQQ), which has more than doubled this performance at 130.58%. This ultimately puts long investors in DIA at a disadvantage when compared to the tech-heavy instruments like QQQ.

When we take a look under the hood and view the sector weightings within the ETF, we can see that DIA is woefully underrepresented in these areas. This does not bode well for DIA if the dominant market trends seen in the early portions of this year continue. Unfortunately, this negative looks as though it is being priced into DIA as we speak.

Currently, the Dow is caught in a sideways trading range that has been in place since February. Is this a mere coincidence? Or are there other reasons to describe why trading sentiment seems to be so indecisive. Our view is that it is not a coincidence that investors are still reluctant to buy heavily into the DIA ETF. Flailing names like General Electric (NYSE: GE) have placed the index in a negative light, and it will be key for these companies to show evidence of modernization in order to maintain a strong position in the majority investor purview.

As dividend investors, another one of the troubled stocks we spend a large amount of time focusing on is Exxon Mobil (NYSE: XOM), which currently makes up 2.3% of DIA’s holdings. At the end of April, Exxon reported disappointing earnings with a per share number of $1.09. This was 1 cent below the market expectations, and it helped keep the stock under pressure at its currently depressed levels.

The report was not all bad, however. Exxon did manage to beat on the revenue forecasts, while upstream activities were shown to have progressed (with upstream earnings of $429 million). The company reported cash flows of $10 billion, which was the highest quarterly cash flow for Exxon since 2014. Cash flow from asset sales was seen at $1.4 billion, which is critical given the importance of the dividend for many long-term investors in XOM.

Exxon’s Papua New Guinea facilities resumed production, and the quarterly details were reflective of progress on the company’s plans to deliver the potential for value growth in its operational efficiency practices. Oil-equivalent production came in at 3.9 million bpd (which is a decline of 6%, or down 3% if we remove divestments and entitlement effects). Exxon bought back 5 million shares during the Q1 period in purchases totaling $425 million. Buybacks should continue in order to offset dilution from stock-based compensation.

We are currently long XOM, as it meets our portfolio criteria for elevated dividend yields and low historical valuations. We believe the stock meets these criteria better than the broader ETF holdings in DIA, and prefer to exercise our outlook on energy through XOM with its 4% yield payouts. The company should continue to benefit from rising oil prices, as the chart above shows that the energy sector has actually led the way in many of the broader stock declines that have been seen over the past few weeks. Further strength in these areas could lead to a more bullish revision in our outlook for DIA.