John Kosar, CMT, Warns Of ‘Jenga Top’ For ‘Top-Heavy’ Stock Market

John Kosar, CMT, of Asbury Research, published a new report Monday warning that the S&P 500 may be set up for a steep decline if it falls below a key point.

"The S&P 500 sits just 1% above a level that, if breached, could trigger a broad selloff," writes Ryan Vlastelica on MarketWatch.

"Kosar’s analysis is based on recent trends in flows into exchange-traded funds. He noted massive inflows into funds tracking the S&P 500. Specifically, $11.8 billion has gone into the SPDR S&P 500 ETF SPY, -0.04% over the past week, according to FactSet data. That influx expanded the ETF’s assets by about 5%; currently, there are nearly $283 billion in assets held in the fund, the first and largest ETF on the market.

"Among similar products, $2.5 billion has gone into the Vanguard S&P 500 ETF VOO, -0.05% over the past week while an additional $823 million has flowed into the iShares Core S&P 500 ETF IVV, -0.04% over the same period, according to FactSet data. More broadly, $17.7 billion has flowed into the category of large-capitalization U.S. stocks over the past week, by far the most of any ETF segment. To compare, roughly $3.5 billion flowed into tech stocks, the category with the second-highest inflows," Vlastelica writes.

"This represents a new surge of bullish conviction that is immediately positive for the broad market. However, the danger of that much asset expansion, that fast, is that it makes the market top-heavy—like a Jenga game with a lot of newly-added weight at the top," Kosar said in the report.

Kosar referred specifically to the SPY in his analysis, saying that a decline below 2,020 "puts more than half of those newly-added assets into the red, and a decline below 2,886 puts all this new money into the red—which could trigger a broad market correction."

Kosar founded Asbury Research in 2005, where he uses an adaptive blend of technical and quantitative metrics to create more intuitive forecasts than a traditional approach.