Red Flags and A Technical Overview On The Market

Another week, another attempt at the S&P 500 entering record territory. However, this week's fears of the Cypress financial bailout causing a run on European banks has kept the markets down.

Last month, I addressed some of the concerns I had on a weakening market.

Let's compare today's charts with last month, and further address some of the red flags that I am seeing.

A View From Above

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

Today, the S&P 500 is still rising:

Last month, the S&P 500 was still rising:

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. While Nasdaq is rising, it hasn't kept pace with the S&P 500:

Last Month:

And the all-technology index, Nasdaq 100, has barely risen even as the S&P 500 closes in on record highs.

Today's Nasdaq 100 chart shows a small rise since last month, but for the most part technology is still not participating in the current uptrend:

Last Month:

Sector Strength

As I mentioned in a 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.

Today - small decline in the tech sector, but mostly unchanged:

Last Month:

Red Flags

As the S&P 500 index tries to reach a record level, more and more red flags are showing up.

There are three areas that I am concerned with:

ETF Outflows

The markets are rising, but ETFs continue to show outflows in the S&P 500 index (SPY) and the Dow (DIA). This is the first time since the 2009 market bottom that this divergence has occurred and a potential sign that the smart money is moving out of equities.

Also, the outflows in the gold sector (GLD) and TIPs (TIPs are linked to inflation growth) may be an early indication that deflation worries are starting to increase:

Margin Levels

Speculative investors continue to buy on margin. Margin levels in investment accounts are at levels where past market reversals have occurred. If the banking issues in Cypress spook the European market, we may see a quick reversal as investors quickly remove margin risk from their portfolios.

Extreme Optimism Without The Participation of the Technology Sector

Historically, the technology sectors leads the market. The tech sector generally has the highest average Beta and, as a result, risk-seeking investors (along with their margin accounts) heavily weight their portfolios towards tech stocks.

However, the technology sector is still not rising with the broader market.

Since 2009, the Nasdaq 100 has significantly outperformed the broader markets:

However, that trend has reversed this year:

We are seeing institutional investors (who have been long the market since 2009) finally moving out of equities. However, these investors are being replaced with short-term speculative investors buying on margin -- a trend that is unfortunately short lived.

ARTAIS Update:

While the markets continue to gyrate, our ARTAIS model is still conservatively weighted. We view the current market risk higher than average. As ARTAIS is a conservative growth strategy, we continue to feel that a prudent investment strategy is the wisest choice.

As long-term investors, a few missed percentage points at the top of a potential market cycle is worth missing out on in order to avoid any major decline. (Keep in mind that markets decline much faster than they rise.)