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.

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.