Dow Jones Industrial Average (DJIA) started showing a divergence from Nasdaq 100 and S&P 500 indices sometime in late 2022. The 50-day moving average (DMA), a widely followed short-term trend tracker, has been reclaimed by the Dow DJIA. Being above it suggests a bullish view for the near term. The Dow’s 50-DMA also crossed above the 200-DMA in mid-December to create a positive technical pattern called a “golden cross.”
The technical outlooks for the technology-heavy Nasdaq-100 Index, the S&P 500 index, and the Nasdaq Composite Index remain stuck behind negative chart patterns, in striking contrast to the Dow’s bullish position.
The equity rally in late 2022 was on the back of the Fed slowing down the pace of rate hikes. But, many analysts think that the next leg of the rally will be when rates start to fall. Morgan Stanley is of the view that the next leg would be led by a catch-up in Nasdaq growth stocks relative to the Dow Industrials and Russell 2000 and since the S&P 500 is a large-cap growth index, it too would benefit more than the Dow.
Over the last 1-year, Dow 30 is down by 4% while Nasdaq 100 and S&P 500 have fallen by almost 24% and 13% respectively. The big pullback in Dow 30 has been seen over the last 3 months with the index showing a gain of 9% compared to a 6.36% jump by the S&P 500 and a 2.25% growth in the Nasdaq 100 over the same period.
However, it might be too early to conclude that divergence is taking shape between the leading indices. Since the start of 2023, Nasdaq and S&P 500 indices are showing strength over Dow. The Dow 30 is up by only 0.31% YTD compared to 1.55% and 3.25% of the S&P 500 and Nasdaq 100 indices respectively.
The index that has fallen the most is the Nasdaq 100. Being a tech-heavy index, the rising rate environment impacts the tech stock valuations more than other stocks as they had run up a lot. On the contrary, any rate cut will be positive for the sector. Although tech stocks’ valuations may be still higher, the actual reversal will hinge on management’s commentary and guidance for the technology sector.
The S&P 500 index accounts for about 80% of the market capitalization of US stock exchanges and is the primary indicator of large-cap US stocks, comprising almost 500 major firms spanning about 11 sectors. The Nasdaq 100, also known as the tech index, differs significantly from Dow 30 and S&P 500 indices. The Nasdaq 100, a large-cap growth index that excludes financial equities, contains 100 of the largest domestic and foreign corporations.
However, Dow 30 comprises companies catering largely to the US economy. The Dow Jones Industrial Average is a gauge of the US economy, its companies, and the country’s consumption habits. It reflects corporations with sole US locations.
With the US Fed unwilling to start cutting rates till inflation falls from the current level of 6.5% to under 2%, the risk of the US economy going into recession with a hard landing looks high. How the US stocks listed on the Dow 30 index perform will be interesting to watch.