What record high? Signs of an imminent tech stock meltdown keep piling up
- The market has been celebrating the climb towards new record highs in tech stocks over the past few weeks, but a troubling situation has developed behind the scenes.
- It recently caused a proprietary indicator developed by The Leuthold Group to reach a sell signal for the tech-heavy Nasdaq Composite index.
- The signal is just the latest in a long line of evidence suggesting that the tech rally is getting exhausted.
Everyone knows major tech indexes are sitting at all-time high levels. But under the surface, a dirty little secret lurks.
Last week, the number of stocks in the tech-heavy Nasdaq Composite index trading at one-year lows outnumbered those at one-year highs, according to data compiled by The Leuthold Group.
This is cause for concern.
The bottom line in the chart below shows a proprietary indicator maintained by Leuthold and designed to identify times when the numbers of new highs and new lows have been simultaneously large. The firm has found over time that when it climbs above a certain level, it signals selling in the Nasdaq.
As you can see, this "sell" threshold was breached during the fervor last week, which could mean a tough patch ahead for tech stocks. In fact, the indicator signaled a sell in the periods around both the dotcom bubble and financial crisis - although it hasn't always indicated a bear market.
The Nasdaq signal is "unequivocally bearish for stocks in the short-term, and probably even the intermediate term," Doug Ramsey, Leuthold's chief investment officer, wrote in a client note.
Other signs of tech-stock exhaustion have been popping up with increased regularity. A recent analysis from Goldman Sachs showed that hedge funds have rotated out of tech and are now favoring the healthcare sector over all else.
This same trend has also been seen on a fund flow basis. Since the beginning of July, the SPDR Technology Select Sector ETF has seen $63 million of outflows. That contrasts sharply with the whopping $1.4 billion of new capital that's poured into the fund's healthcare counterpart.
Further, short sellers - or investors betting on an asset to decline - have tech shares firmly in their sights.
They're shorted roughly $37 billion worth of stocks in the so-called FAANG group (Facebook, Apple, Amazon, Netflix, and Google) over the past year, according data from financial analytics firm S3 Partners. That's a 42% increase from a year ago, Bloomberg finds.
In the end, Leuthold isn't necessarily calling for a bear market in the tech stocks that have so thoroughly dominated the last few years. He just sees a short- to medium-term reckoning in the cards.
But once the stocks hitting lows begin outpacing those hitting highs, that's when it'll be time to truly worry. Stay tuned.