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Keep a wary eye on the surge in big tech stocks

Only two things seem to matter to Wall Street these days. Any clue on rate hike timing from the Federal Reserve. And the movement of big tech stocks. Names like Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google parent Alphabet (GOOGL), colloquially known as the "FANGs," but also stocks like Apple (AAPL), Intel (INTC) and eBay (EBAY).

Because of their heavy market capitalizations, price momentum, and the fact that fewer and fewer stocks are participating in the post-September uptrend, earnings results from these guys have been closely watched. And unless investors have exposure to these big tech stocks, they've missed out on the bulk of the October market rebound.

That focus continued on Tuesday when Apple reported solid results, lifting shares in after-hours trading (but only modestly after a solid early jump) and helping send Nasdaq futures higher.

While this is all good on the surface, big tech's dominance of both market attention and price action masks some deeper issues within the market that investors should be wary of.

But first, the cavalcade of good news that has driven tech-stock performance:

Last week, Microsoft (MSFT) beat estimates on strength from its cloud and enterprise units. Google parent Alphabet cited strong ad-click growth to beat top- and bottom-line estimates. And Amazon posted its second consecutive surprise quarterly profit -- and its third straight revenue surprise and fourth straight earnings per share beat -- as its cloud services business continues to impress.

As a result, Microsoft jumped some 13 percent to hit a new record high, Google gained roughly 7 percent to tag the $750-a-share level and Amazon gained more than 10 percent on Friday to challenge the $620-a-share level for the first time.

From its late September low, Facebook is now up nearly 21 percent in a smooth, unbroken uptrend. The company will report results on Nov. 4 after the close. Intel has gained more than 14 percent for the month-to-date after reporting better-than-expected earnings on Oct. 13. And eBay has soared more than 17 percent over the last four trading session after reporting a positive earnings surprise on Oct. 21.

Now, for the bad news.

Consider that even though the PowerShares QQQ Trust (QQQ) -- a popular exchange-traded fund that tracks the Nasdaq 100, a subindex of the 100 largest stocks within the 3,000+ stock Nasdaq Composite -- has jumped over its dot-com era high near $110 to challenge the record high of $114.11 set in July, other measures of the stock market are struggling.

The Russell 2000 small-cap index, a collection of more economically sensitive stocks, is down nearly 12 percent from its June high. Even the broader Nasdaq Composite is down nearly 4 percent from its summertime high.

And that's what's so worrisome: Narrow participation like this is, historically, a sign of uptrend vulnerability and cautious buyers.

The team at SentinenTrader notes that Friday's broader tech-driven surge was rare, with the S&P 500 rallying at least 1 percent to a two-month high, while less than 60 percent of NYSE volume flowed into rising stocks (again, because stocks like Apple carry a lot of weight in a market-cap-weighted index like the S&P 500 and Nasdaq Composite).

This has happened only six other times since 1955. In all but one instance (1999), stocks were lower one month later by an average of 2.5 percent.

The weakness could come sooner, however.

On Tuesday, the QQQ rose while the Russell 2000 iShares (IWM) lost more than 1 percent. According to SentimenTrader, of the 30 other occurrences of this divergence, a week later the QQQ was higher only 27 percent of the time, with an average loss of 1.3 percent.

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