The Mystery Of The Dow Index..Here is an interesting trend trade swing opportunity. I already have my index quota filled although as US index long is not the worst of ideas. The trend trade in question is the Dow Jones (US30) which is technically setting up and awaiting a daily buy signal/bar.
Here is the interesting aspect. Why on earth is the DJI dropping for over a week back to averages while the SPY/SPX remains near ATHs? This divergence is creating the DJI trend trade but the fundamentals behind it need to be understood.
Both indices should be behaving similarly as they have for quite a while now but the recent divergence has to be due to a combination of risk factors which are just now aligning that way. Sector composition is different, right? S&P is heavy tech and growth while DJI is traditional large caps. But they should react the same way to the sentiment environment and FED cut expectations so what gives?
Maybe it is just tech. Tech is booming again with AI so it stands to reason that the S&P would hold an edge. Still, the environment is the same for traditional stocks and even if there should be a difference in gains, there surely shouldn't be a 100% divergence?
Maybe it is investor sentiment? Markets are all in on AI while traditional stocks are seeing pre holiday profit taking? Could be. Is the December H2 Santa rally around the corner and the DJI dip buy is in play? That's a lot of speculation for such a divergence.
Then we come to macro and this is where I think things begin to look different. Inflation has been coming in hot. But so has some other macro, macro that favours growth - and the FED cuts do to - so the S&P strength is probably warranted. The DJI is not so much about growth and probably more sensitive to inflationary pressures. I think that the inflation prints coming in hot may have been brushed off by the S&P and broader market, including the FED... but not by interest rate sensitive sectors of the DJI.