The June employment data released last Friday was mixed but the market cheered the mixed data as goldilocks environment for the stock market.  All three indexes rallied and the S&P 500 and NASDAQ continued to make new highs.  The NASDAQ has become a game of whack-a-mole.  Nvidia finished rally, no problem, just rotate to Apple, Amazon or Tesla.  The NASDAQ is doing whatever it takes to keep up the rally.

Underneath the surface, the most economically sensitive sectors such as housing, Visa and MasterCard topped in March 2024.  Bitcoin topped in March 2024 too.  Bitcoin has become a risk asset class that typically reflects liquidity.  The DOW topped in May 2024 on weekly chart, but not on monthly chart yet.  The under performance of the DOW relative to the NASDAQ over two months period typically indicates a market top for the NASDAQ.  The DOW is not like the small caps Russell 2000 that can under perform the general market indefinitely and causes no harm.  The DOW is more economically sensitive than the NASDAQ.  So when the DOW tops before the NASDAQ, the market is sending us a message that the NASDAQ can’t keep going up forever.

We went back to 1987 to find out what happened to the general market when the DOW topped two months before the NASDAQ.  We found three incidents that all resulted a minimum of 10% correction.  Assuming the May 2024 high in the DOW is not taken out in the near future before the NASDAQ tops, we will have the fourth incident of the DOW tops two months before the NASDAQ.

Below is the table showing the times when the DOW topped two months before the NASDAQ.

The three tops came from the bottoms in the table below.

The three bottoms showed two times of the NASDAQ outperforming the DOW and one time of about equal performance.  The out performance of the NASDAQ out of the October 1998 low is astonishing by 169%.  That astonishing NASDAQ performance eventually created the DOTCOM bubble top.  By comparing the rally out of October 1998 low to October 2023 low, we don’t have a NASDAQ bubble yet.

This rally out of the October 2023 low is very similar to the April 1997 low.  It was Internet excitement in 1997, now it is all about AI in 2023.

Assuming the S&P 500 and NASDAQ get dragged down by the DOW by the next week or two, we should expect a fast correction of 10-15%.  This correction will be a buying opportunity.

France just had an election that will result a hung parliament.  French election didn’t produce a dominant winner therefore the market will expect more chaos in governance and further economic turmoil.  A crash in the French stock market will not surprise anyone.  Will the overseas turmoil spill over to the US stock market?  The US stock market needs a catalyst to have a fast correction.

Below is the DOW daily chart.

You can see the DOW is clearly contained in the triangle since the May 20 high.  This triangle needs resolution.  Based on the economically sensitive sectors topping in March 2024, we expect the DOW not to surpass the May 20 high.  If the DOW takes out the May 20 high at 40077 in the near future, then the overhead resistance is at 40152-40278.  If the DOW can trade above the resistance, then all bets are off.  It’s a breakout!  We shall see.