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All signs seem to be pointing to a strong, year-end rally. Well, at first glance, that seems to be the case.
Earnings from tech giants like Apple (AAPL) , Amazon (AMZN) , Alphabet (GOOGL) and Nvidia (NVDA) have been strong. Same for most industrials, financials and other S&P sectors — with the exception of retailers like Macy’s (M) , J.C. Penney (JCP) and Kohl’s (KSS) . Even energy prices are on the rebound.
So where are the warning signs? Look no further than the Russell 2000. The iShares Russell 2000 Index (ETF) (IWM) scared a few investors Thursday when it abruptly dropped below its 50-day moving average. Answering a prayer from the bulls, though, the index rallied back above that level by Thursday’s close and is clinging to it again on Friday.
Could this merely be a buying opportunity in the small caps? Of course. But as the Russell has grinded lower over the last six weeks, the 50-day moving average could be taking its last breath before a larger decline.
The next concern? High-yield bonds. Both the iShares High Yield Corp Bond (ETF) (HYG) and SPDR Barclays Capital High Yield Bond ETF (JNK) have shown weakness over the past week. This chart highlights the concern, as the S&P 500 generally has a high correlation to the high-yield bond market.
Does that mean we should abandon all longs and flip short? No, not at all. But it’s reasonable to point out that after Thursday’s tax-cut scare, the market could probably use a breather. The S&P 500 has hit more than 65 new all-time highs this year and hasn’t had a 3% pullback in more than 250 trading days, a new record. Stocks have hit or neared record-long stretches of low volatility.
Could that change? Yes. But is it the end of the world? No.
We don’t need to completely alter our market outlook or thesis. Just know that a pullback is possible and these are a few of the warning signs to keep note of.
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