A Technical Look At The Current Market

The S&P 500 Index has been rising consistently this year, leading many to wonder if this is the start of a new long-term bull market. Volatility has been low and market commentary from the financial media continues to be positive.

Everything looks great - right?

Unfortunately, when we dig deeper into the underlying components of the market, we are actually in a high risk environment that may potentially harm investors who are too bullish.

Below are some of my thoughts when I take a more technical view of the US stock market. Where the strength lies, where the risk is, and where the opportunities really are.

A View From Above

Year to date, the S&P 500 (aka the market) has been, for most part, going up unchallenged.

However, the usual leader of the market, technology, has not been following the broader market's lead.

The tech heavy Nasdaq index has not been as strong:

And the all technology index, NASDAQ 100 (QQQ), has actually not been rising with the S&P 500 index:

Sector Strength

As I mentioned in my past commentary, Investors Have Been Sleeping Too Well At Night, technology is currently the largest sector in the S&P 500 Index. A continued decline in the technology sector may cause the market to fall.

However, it is not just the tech sector that looks weak. Many of the individual sectors that make up the S&P 500 index are starting to diverge as the market rises - a potential sign of a market reversal:

Europe and China Are Starting To Weaken 

The other two major engines of global growth, Europe and China, are starting to weaken/diverge as well:

Volume Is Still Low

A big red flag is the continued decline in volume. In a rising bull market, we should see volume increasing. Instead we have seen a continued decrease in volume - something that typically happens in bull rallies within a bear market.

In addition, we are still seeing volume spikes only when the market declines:

Where Are The Opportunities?

This time of year is historically strong for the energy sector (XLE). Already we have seen the energy sector outperform the market:

Gold (XAU) looks very oversold here, and investors may view any action from Government Banks in the US, Japan and the Eurozone as a reason to hedge against inflation. (Gold is viewed as an inflation hedge by many)

ARTAIS Model Update

Our ARTAIS (Absolute Returns Through Adaptive Investment Strategies) model is still very conservative. We are taking advantage of the strength in the energy sector and still have a small portion of the portfolio allocated to US equity markets as they continue to rise. However, the exposure to US equities will quickly be reallocated to cash or short positions if/when the broader markets start to decline.