Some Chinks in the Armor? Five things to watch.

I noticed a few things over the weekend that I thought I should point out to you because they could potentially be Bearish for equities.

First of all, the Yield Curve has become flatter over the past year.  This means that the difference between short-term yields and long-term yields has flattened.  This is because the Federal Reserve has raised short-term rates while longer-term rates have remained steady or even fallen slightly.  This is because investors see long-term yields as an acceptable substitute for the potential of lower returns in equities so they will purchase longer-term bonds  This demand puts downward pressure on longer-term rates.  Remember, when bond prices go up their rates go down.

Second, Consumer Confidence is near 20 years highs.  This may seem like a bullish indication but it isn't.  When sentiment reaches extremes, whether it is negative or positive as is the case here, it is often a contrary indicator.  In other words, when too many people are confident they invest all of their funds into the market.  Eventually this demand runs out and there are no buyers left.  Then the markets will head south because there will always be sellers.  There will always be sellers because people will always have the need to raise money for various reasons, such as paying tuition or buying a house.  When there are no buyers in the market prices can fall dramatically.

Third, the Financial Sector has not participated in this most recent rally.

 

Fourth, the Technology Sector has led this rally and it is very overbought. 

Fifth, in the past year the price of Oil has risen from $50 to $70.  This is due to a strong economy but eventually the price will get high enough that it will start to have negative repercussions on the economy.