How 4 ETFs May Be Signaling a Short-Term Hesitation

The IWM, MDY, QQQ, and SPY are pausing near major year-over-year gain levels, suggesting last year's early struggles could recur

by Andrea Kramer |

Published on Jan 12, 2017 at 12:52 PM

Tech stocks have been on fire lately, as evidenced by the Nasdaq Composite's (COMP) run to record highs. In fact, the COMP has been assailing new heights even as the Dow Jones Industrial Average (DJIA) stalls just shy of 20,000. What's more, the PowerShares QQQ Trust (QQQ) has just overtaken the SPDR S&P 500 ETF Trust (SPY) on a year-over-year basis for the first time since the election, though Schaeffer's Senior V.P. of Research Todd Salamone cautions that both exchange-traded funds (ETFs) could run into a speed bump.

The iShares Russell 2000 ETF (IWM) and SPDR S&P MidCap 400 ETF (MDY) -- based on the Russell 2000 Index (RUT) and S&P MidCap 400 Index (MID), respectively -- are both churning around their 30% year-over-year (YoY) levels, "amid a loss of leadership from the small-cap and mid-cap stocks," Salamone noted in this week's Monday Morning Outlook. However, you'll note that the IWM and MDY spent an ample amount of time bumping up against their 20% YoY levels before a pullback and subsequent jump. "If the SPY and QQQ behave as IWM and MDY did last year, there is a chance that further advances are capped at 20% YoY," said Salamone.

Indexes YoY Jan 11

But note, too, that the YoY anchor point changes daily, resulting in different 20% gain levels. For example, on Feb. 1, SPY's 20% YoY advance will be $232.38, but will drop to $219.43 on Feb. 11. This is due to last year's two-week retreat in SPY, from its Feb. 1 peak to its Feb. 11 trough.

This could be an cautious sign for the aforementioned exchange-traded funds (ETFs), as all four are currently pegged to 2016 anchor points that trended lower through February (albeit by healthy YoY gains). If this trend holds over the next few weeks, it could pressure stocks lower in the near term, mirroring the pattern from early last year.

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