Divergence Alert: Dow Jones Soars, Nasdaq Struggles
In a surprising turn of events, the Dow Jones has hit an all-time high while the Nasdaq struggles, creating a fascinating contrast in the US stock market. This divergence has sparked intrigue and raised questions among investors.
The recent sell-off in tech stocks, led by AI-related concerns, has caused a rotation away from technology names. The Dow Jones, however, has been a standout performer, gaining over 500 points in a single week. Meanwhile, the Nasdaq 100 and S&P 500 have lagged behind, with the former experiencing a steep decline of nearly 2%.
This scenario is a classic example of intramarket divergence, where different markets within the same asset class move in opposite directions. Such divergences often signal important turning points and can be a powerful indicator when supported by other technical or fundamental factors.
AI Trade Jitters: The Spark for Tech Sell-Off
Last week, worries about the AI trade resurfaced, with Oracle missing revenue forecasts and Broadcom flagging margin pressure due to custom AI chips. These developments have reignited concerns about sky-high valuations and capital expenditure outpacing earnings in the AI sector.
Key Data Ahead: Non-Farm Payrolls and Consumer Price Index
As we move forward, the combined October-November non-farm payrolls report and the November consumer price index (CPI) print are crucial data points to watch. The November inflation data is expected to show core inflation holding steady near 3%. The upcoming non-farm payrolls report, released on Tuesday, 16 December, is anticipated to show a rise of 50,000 jobs, with the unemployment rate remaining at 4.4%.
Technical Analysis: Nasdaq 100 and S&P 500
The successful defence of critical support levels by the Nasdaq 100 and S&P 500 on 21 November, followed by a strong rally the next week, initially indicated a bullish outlook for US equities. However, the recent emergence of intramarket divergence near record highs has complicated the picture.
For the Nasdaq 100, we are now taking a more neutral stance. We will closely monitor for a pullback towards the 23,500 zone, which could present a buying opportunity, or a break above resistance near 26,200, indicating further upside potential.
As for the S&P 500, the recent divergence has left it undecided. Given the seasonally strong year-end period, we lean towards expecting further upside, with the broader market potentially tracking the Dow Jones' new highs. However, a sustained break below support near 6800 - 6760 would suggest that the S&P 500, and possibly equities overall, are aligning with the Nasdaq's relative weakness.
And here's the intriguing part...
This divergence raises an interesting question: Will the Nasdaq and S&P 500 follow the Dow Jones' lead, or will they continue to lag behind? The upcoming data and market movements will provide crucial insights into the direction of these major US equity indices.
What do you think? Is this divergence a temporary blip or a sign of a broader shift in market sentiment? Share your thoughts in the comments below!
