Stocks Remain Chirpy, But Note What Happened Last Week

U.S. stocks last week continued to hold up and thus remained in the ultra-low-volatility squeeze environment they have been in for most of 2017 thus far. Nothing to see here, move along … right? I absolutely am and want to continue to respect the year-to-date up-trend in stocks but I would not be doing my job if I wasn’t looking for warning signs as to what could derail this slow and steady push higher in stocks, if only for a while.

Stocks Remain Chirpy, But Note What Happened Last WeekThe S&P 500 as represented by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is up 17% for the year while its smaller cap cousin the Russell 2000 as represented by the iShares Russell 2000 ETF (NYSEARCA:IWM) is up close to 10%. But did you know that the IWM ETF has fallen about 3% over the past few weeks while the SPY ETF continued on its relentlessly quiet push higher?

Much of the continued, albeit marginal, push higher in the SPY ETF over the past couple of weeks can be explained by the relentless bid in a few ultra-large cap technology names, the likes of which don’t need a new introduction in this column.

While directionally this is not something to fight until a trend change occurs, the outsized allocation on the part of fund managers and retail investors alike to these few stocks in my eye is increasingly posing risk to the market.

How? Even just a small hiccup in one  of these stocks at this juncture could quickly turn into a mini avalanche for a swift 5% – 15% correction in the major indices. To be clear, this does not have to be this year’s business but it is important to be aware of the dynamics at play.

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Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day

Another warning flag worth respecting but not yet giving into is that of the breakdown in high yield bonds last week as represented by the iShares iBoxx High Yield Corporate Bond ETF (NYSEARCA:HYG). High yield bonds often times has a leading quality to them over stocks and thus the clear breakdown in the HYG ETF (red line) last week must be noted.

Click to Enlarge

Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day

On the positive side through a pure technical lens consumer discretionary stocks as represented by the Consumer Discretionary Select Sector SPDR Fund (NYSEARCA:XLY) have  been in a well-defined sideways consolidation range since June and increasingly look giddy for a breakout as can clearly be seen on the chart. But here too I would be ignorant not to point out that this ETF’s single largest holding with 17% is none other than, Inc. (NASDAQ:AMZN).

In summary, yes stocks remain trending higher and that is nothing to disrespect yet not noting the increasing risk to indices and ETF’s based on the massive size of a few large cap techy stocks is akin to purposely driving with blindfolds.

Check out Serge’s Trade of the Day for Nov. 13.

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