After the Memorial Day closure, US equities reopened with the S&P 500 and Nasdaq Composite reaching fresh intraday records, while the Dow Jones Industrial Average fell about 0.3% and Dow futures drifted lower in thin overnight trade. The divergence came as chip-linked momentum dominated: Micron jumped 17% and moved above $1tn in market capitalisation, with Seagate and Western Digital also rising, leaving the price-weighted Dow lagging given its heavier exposure to industrials and financials rather than high-beta semiconductor names.
Dow futures traded near 50,800 early on before sliding towards 50,500 by the premarket, having eased from around 51,000, with Stochastic RSI near the bottom of its range. In energy, West Texas Intermediate fell about 2% to roughly $93 a barrel even as Brent rose around 4% to near $100 after US strikes in southern Iran. Rate expectations have also shifted: the CME Group FedWatch tool now implies about a 13% chance of a Federal Reserve hike in July. Attention turns to Thursday’s PCE release at 12:30 GMT, with core PCE seen at 3.3% YoY and headline PCE at 3.8%.
Market Breadth, Tech Euphoria, and Warning Signs
We are seeing a clear split in the market that is cause for concern. The Nasdaq 100 has rallied over 4% in May, but the Dow Jones Industrial Average is struggling to stay positive for the month. This divergence suggests the rally is built on a narrow foundation of tech euphoria, not broad economic strength.
This is a familiar pattern that we should not ignore. We saw a similar setup in late 2021, where a handful of mega-cap tech stocks masked underlying weakness in the broader market before the 2022 downturn. The Dow’s composition of industrial and financial companies makes it a better gauge of the real economy, and right now it’s flashing a warning sign.
Bearish Dow Positioning, Energy Markets, and PCE Risks
Given the steady drop in Dow futures toward the 50,500 level, we see an opportunity to position for further weakness. We are considering buying puts on the SPDR Dow Jones Industrial Average ETF (DIA) with expirations in the next few weeks. The path of least resistance appears to be lower as long as futures remain below the 50,800 resistance area.
The energy market is adding to our conviction. The widening spread between Brent crude, now near $100, and WTI crude points to specific supply chain risks that inflation models may be underestimating. Reports from the Strait of Hormuz show shipping insurance premiums have jumped 15% in the last 48 hours, suggesting geopolitical tension is not fading.
All eyes are now on this Thursday’s Personal Consumption Expenditures (PCE) inflation data. After last week’s Consumer Price Index (CPI) came in hotter than expected at 3.6%, another high PCE reading could force the Federal Reserve’s hand. The odds of a July rate hike have already climbed from 13% to nearly 18% this week, according to the CME FedWatch Tool.
This makes short-term bearish positions on the Dow attractive, especially with volatility relatively low ahead of the data release. We will use any strength toward the 50,800 level as a chance to add to downside exposure. A hot PCE print could easily send the index down to test the 50,000 psychological level.
