Grumpy Old Head Men

It is a brave new world, or so we are repeatedly told. And that means we must abort the old ways of thinking, since AI will transform everything, especially markets. 

Of course, this sounds an awful lot like the four most dangerous words on Wall Street: "This time is different." And it never is, according to history. 

However, that does not mean AI is a complete fraud.

Just as the internet was here to stay twenty-six years ago, so too will AI likely be the wave of the future. But that does not preclude a vast cleansing process like we saw from 2000-2002 in the Nasdaq to wipe away the excesses from the system before moving forward. 

On that note, if you are a grumpy old (or "old head," as the kids would say now) man like myself, you will note two classic bearish divergences to equities playing out in real time.

First, the Dow Jones Industrial Average failed to print a new high even though we know the Dow Jones Transportation Average, S&P 500, Russell 2000, and Nasdaq Composite all did this spring. As you can see on the first daily chart, below, the Dow remains below its February highs, albeit slightly. Still, a divergence is a divergence until negated. The old-timers would have latched onto this divergence, no doubt. 

Next, the High Yield Corporate Bond ETF, HYG (second daily chart, below) is flashing a massive negative divergence to risk-on, along with JNK (Junk Bond ETF). HYG tracks debt issued by companies with credit ratings below BBB (typically BB and B ratings). Credit investors are often seen as the sharpest in the room. So, with their less than sanguine view here it is a red flag.

As for the Dow, NVDA earnings tomorrow should be a big weighting and could decisively make or break this divergence with a big move once and for all.