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The Dow Celebrates Alone

The blue-chip index hits another high, but broader averages miss the party as divergences mount.

An afternoon swoon put U.S. equities investors on guard about the future of this stock market rally and the divergences under way in the world.

Major indices rallied early in the day on rekindled rate-cut hopes following a benign core consumer inflation reading first thing Tuesday morning. But a dismal housing report rattled traders' nerves later in the day.

On volume of about 60% more than average, the

S&P 500

exchange-traded fund, the

SPDRs

(SPY) - Get SPDR S&P 500 ETF Trust Report

staged an about-face reversal after about 2 p.m. EDT, as did the

Nasdaq Composite

exchange-traded fund, the

PowerShares QQQ

(QQQQ)

. Both ETFs ended the day down, by 0.2% and 0.9%, respectively.

"It was a pretty ugly reversal," says Todd Leone, head of listed trading at Cowen & Co., who added that is the first time in a long time the market has made such a hairpin turn -- a bearish signal. He acknowledges stocks have been so strong that the market could turn right back up. But he was anxious. "We've had such an incredible move here, I'm just not sure what to make of this."

The nervous energy may be warranted as some of the growth-oriented segments of the market struggled Tuesday and marked a divergence from the blue-chip, large-cap multinational names that have outperformed in this rally.

The small-cap Russell 2000 fell 1% on the day, while the Amex Securities Broker/Dealer Index lost 1.3% and the Philadelphia Semiconductor Sector Index slipped 1.2%.

The blue-chip

Dow Jones Industrial Average

was the outlier, marking yet another all-time closing high after soaring to a new intraday all time high as well. The Dow finished up 0.3% at 13,383.84 after reaching 13,481.60 intraday. The

S&P 500

fell 0.1% to 1501.19, and the

Nasdaq Composite

slid 0.8% to close at 2525.29.

Market internals reflected the action in major averages: Declining stocks bested advancers by 19 to 12 on the

Big Board

and by better than 3 to 1 on the Nasdaq, where up volume was just 22% of the 2.1 billion-share total.

The divergence in the stock market highlights the U.S. economy's delinking from, and dependence on, other economies around the globe.

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The Russell represents unbridled growth in the U.S., while the large-cap Dow represents unbridled growth in the world. With the U.S. well into its midcycle slowdown, the global growth bet is safer.

Indeed, Europe and Asian economies are working to put the brakes on their economies. Only the U.S. is out there talking about rate cuts. Executives of large-cap multinational companies' repeatedly said their earnings are swelling because of overseas sales, not growth at home.

Supporting the big-cap Dow Tuesday were 16 of its 30 components ---

General Motors

(GM) - Get General Motors Company (GM) Report

surged 4.4%;

Verizon

(VZ) - Get Verizon Communications Inc. Report

and

Alcoa

(AA) - Get Alcoa Corp. Report

gained over 2% apiece.

The Russell-Dow divergence is also similar to the divergence between headline and core inflation, and a reminder of the same global dynamics. Headline consumer inflation, which includes the costs of energy and food, is running at a 5.6% year-over-year rate, rising amid global demand for energy and basic materials. Core inflation, which includes the falling cost of housing in the U.S., has mellowed to a 2.3% year-over-year rate.

While moderating core inflation keeps a red light on rate hikes in the U.S., headline inflation is what hurts consumer pocketbooks -- and particularly those consumers also hurt by mortgage-rate adjustments or rising gasoline prices.

So

Wal-Mart

(WMT) - Get Walmart Inc. Report

and

Home Depot

(HD) - Get Home Depot, Inc. (HD) Report

suffer, as they did today after reporting relatively disappointing earnings. They fell 0.5% and 1.8%, respectively, Tuesday.

But Fed rate-cut hopes based on these slowdown factors are likely overblown, says Michael Darda, chief economist at MKM Partners. The central bank will remain concerned about pass-through of those high-energy and commodity prices to core consumer inflation, he says. That, and recent rebounds in business spending and manufacturing reports are likely to weigh on any rate-cut scenario.

Wednesday brings another heavy dose of data, which will likely highlight some of Tuesday's divergences as well. April's housing starts and building permits come out at 8:30 a.m. EDT and are likely to fall, according to analysts. Industrial production and capacity utilization data are released at 9:15 a.m. EDT, and both are expected to remain stable or increase.

In other words, stay tuned for more divergences.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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