Dow Jones and S&P 500 signal an imminent market crash

The stock market may be headed for turmoil as a historic divergence emerges between the Dow Jones Industrial Average and the S&P 500.

Over the past 200 trading days, the two indexes have moved in opposite directions 50 times – an unprecedented divergence, according to a Feb. 16 post in The Kobeissi Letter. Remarkably, this divergence exceeds those seen during previous financial crises, including the 1994 bond market crash and the 2000 dotcom bubble.

A key factor in this divergence is the dominance of large-cap technology stocks in the S&P 500. Nearly a third of the index is weighted to companies that are benefiting from the artificial intelligence boom, while the Dow, which is less exposed to technology investments, has lagged – by 17 percentage points over the past two years. Such gaps between indexes are rare and have historically signaled big market shifts, often preceding corrections.

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This divergence has also renewed the debate about the significance of the Dow Jones. Some argue that with just 30 stocks and a price-weighted methodology, it no longer reflects broader market trends, while the S&P 500 with its tech composition may provide a more accurate picture.

Analysts warn that if tech valuations are too high, the gap could signal an imminent correction. Alternatively, sector rotation – a shift of capital from technology to industrial and financial stocks – could allow the Dow to recover while slowing the S&P 500’s momentum.

Economist Henrik Seeberg warned that while the S&P 500 has reached all-time highs, this could be a prerequisite for a serious decline. Recent volatility and large capital movements have only heightened fears of an imminent crash.

Alexander Zdravkov