There is a possibility that the stock market may enter an unstable phase due to the extreme gap between the Dow Jones Industrial Average and the S&P 500 index. According to the data from The Kobeissi Letter, a financial market analysis platform, reported by Pinbald.com on the 16th (local time), the number of times the Dow and the S&P 500 moved in opposite directions was 50 times in the past 200 trading days. This is a historically unprecedented level, and suggests the possibility of a future crisis in the market. This gap is a phenomenon that did not even occur during past financial crises, such as the 1994 bond market crash or the 2000 dot-com bubble.
“The Dow Jones Industrial Average and the S&P 500 have moved in opposite directions 50 times in the past 200 days. This level of divergence is unprecedented in history.” – The Kobeissi Letter.
In the past, this gap has fluctuated at the level of 10 to 30 times, and has tended to temporarily surge only when market stress is severe. The Kobeissi Letter analyzed that this data could mean that an abnormal phenomenon is occurring within the market.
#Cause of the divergence between the Dow and S&P 500
The main reason for this gap is the overwhelming growth of large-cap technology stocks. The S&P 500 index is weighted by market capitalization, so it is breaking records due to the explosive growth of AI and cloud-related technology stocks such as the **’Magnificent Seven’**. In contrast, the Dow, which has a much lower weighting of technology stocks, is lagging behind.
- **Approximately 30%** of the S&P 500 is comprised of technology stocks.
- Tech stocks surge on AI, semiconductor, cloud computing boom
- On the other hand, the Dow has a lower weighting of technology stocks and is therefore less sensitive to market changes.
In this trend, the Dow has lagged the S&P 500 by 17 percentage points over the past two years. Such a long-term divergence is unusual and usually foreshadows a major market move. A similar phenomenon occurred during the dot-com bubble, when IT stocks soared and value stocks lagged until the bubble burst and the entire market crashed.
If the current tech rally is overextended, the current divergence could be a sign of a reversion, meaning the entire market is likely to fall as overvalued stocks plunge.
# Dow’s phase change and market outlook
As this gap grows, some are pointing out that the Dow Jones Industrial Average is losing its meaning. The Dow only includes 30 stocks, so it is not representative of the market. On the other hand, the S&P 500 includes 500 companies and reflects broader market trends. Since the Dow uses a price-weighted method, stocks with high stock prices have a large impact on the index. In contrast, the S&P 500 uses a market-cap weighted method, so it more accurately reflects the strength of large-cap technology stocks.
Some experts analyze that the S&P 500 is becoming a more accurate market indicator than the Dow amid economic changes centered on technology stocks. On the other hand, there is also a possibility that **sector rotation** will occur when technology stocks are overheated. If investors move funds from overbought technology stocks to value stocks (industrial, energy, financial), the Dow may rebound and the S&P 500 may slow down. However, on the other hand, if the rise of technology stocks continues, the gap is likely to widen further and the market may become more unstable.
# Market crash warning
While the S&P 500 is currently in a strong uptrend, some analysts are warning that the rally could be a sign of a near-term crash. Economist Henrik Zeberg has predicted that the S&P 500 will hit a historic high and then be followed by a major crash. Furthermore, the recent market volatility and massive capital flight have made a significant decline more likely. Given that the current Dow-S&P 500 divergence resembles the dot-com bubble of the past, investors need to be prepared for a sharp market volatility.
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