Rotation into DJIA Indicates Positive Breadth Development for US Stock Market

Rotation into DJIA Indicates Positive Breadth Development for US Stock Market

The Nasdaq 100 has long been outperforming the Dow Jones Industrial Average (DJIA) during the major uptrend phase. However, this trend seems to be changing as there has been a recent bullish rotation into the laggard, DJIA. This rotation is considered a positive breadth development for the US stock market. In this analysis, we will examine the key support levels and trends in both indices to better understand the implications of this rotation.

Yesterday, on January 2, 2023, the US Wall St 30 Index (proxy of the Dow Jones Industrial Average futures) reached a fresh all-time high of 37,855. This was in line with expectations and continued the upward march of the index. However, the daily gain was relatively small at +0.15%. In contrast, the technology and growth-oriented stocks in the Nasdaq 100, often referred to as the “Magnificent 7,” experienced a sell-off due to negative news flows.

The sell-off in the Nasdaq 100 was triggered by several factors. Apple was downgraded to underweight by Barclays for the first time since 2019, citing soft demand for the latest model of iPhone and potential backlash on US semiconductor firms’ future sales to the Chinese market. Additionally, the US White House may impose more stringent curbs on US semiconductor exports to China, pressuring ASML, a leading Dutch semiconductor equipment maker, to cancel some of its top-end semiconductors peripherals to China. These factors combined to cause a negative day for the Nasdaq 100, which was the worst performer among the major US stock indices with a daily loss of -1.7% compared to the S&P 500 (-0.6%) and the small-cap Russell 2000 (-0.7%).

Dissipation of Nasdaq 100’s Outperformance

The Nasdaq 100 has been leading the major uptrend phases of the S&P 500, Nasdaq 100, and Dow Jones Industrial Average since early October 2022. However, its outperformance has started to dissipate since the beginning of November 2023. This can be seen in the ratio chart of the Dow Jones Industrial Average (DJIA) over the Nasdaq 100. The ratio started to tick up on November 6, 2023, indicating a potential looming outperformance of DJIA over the Nasdaq 100. This shift in performance suggests a healthy sign of improving breadth in the US stock market and reduces the chances of a frothy climatic melt-up in the benchmark stock indices.

The recent sell-off in the US Wall St 30 Index managed to stall at the lower boundary of its minor ascending channel, which has been in place since the low on November 10, 2023. This provides some support for a potential bullish inflection and the start of the next impulsive upmove sequence in price actions. Furthermore, the hourly RSI momentum indicator has shown a bullish divergence condition at its oversold region, indicating a slowdown in bearish momentum. However, it is important to note that failure to hold at the key support level of 37,470 would negate the bullish tone and potentially lead to a minor corrective decline towards the next immediate support levels at 36,170 (the 20-day moving average) and 36,810 (former all-time swing high area of January 5, 2022).

The recent rotation into the laggard, DJIA, is a positive breadth development for the US stock market. This rotation suggests a dissipation of the heavily concentrated leadership of the technology and growth-oriented stocks in the Nasdaq 100. As the rally in the US benchmark stock indices continues, it is important to monitor the key support levels and trends in both the DJIA and the Nasdaq 100 to better understand the direction of the market.

Technical Analysis

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