Tech stock crash: Signs of an imminent meltdown keep piling up

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• 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.

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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.Leuthold
Group

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.