How Long Will The Tech Wreck Last
S&P futures bottomed at 3:15 AM Monday, and by the time stocks finally opened last Monday, the futures were already over 45 points (1.1%) above the early lows. This has been a frequent pattern over the past year, but unlike the previous week, the stock market was able to maintain the positive trend for the rest of the week.
All of the major markets were higher last week, led by an impressive rebound in the iShares Russell 2000 (IWM), which was up 7.3%, followed by the Dow Jones Industrial Average ($INDU) which was up a solid 4.1%. The Dow Jones Transportation Average and Dow Jones Utility Average had good gains of 3.9% and 3.8% respectively.
The S&P 500 led the tech-heavy Nasdaq 100 ($NDX) by a small margin as the $NDX was down 0.90% on Friday. This coincided with the yield on the 10 Year T-Note spiking to the highest level since February 2020, as higher yields are thought to be bad for growth stocks. A look at the YTD performance illustrates how badly the $NDX has underperformed the other averages. It is up just 0.4% year-to-date, compared to the 19.1% gain in IWM.
There are also wide gaps in performance when $NDX is compared to the 7.1% YTD gain for the $INDU or the 5.0% gain in the S&P 500. But how long will the Nasdaq 100 and technology stocks continue to underperform the other market averages, as they have so far in 2021?
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The relative performance (RS) is the indicator I use to measure which market averages are likely to be the strongest or weakest. It works by comparing an ETF to a benchmark market average, usually the S&P 500. If the RS is rising, then the ETF or stock is performing stronger than the benchmark. The monthly RS analysis provides a longer-term outlook for a market, while the weekly RS provides an intermediate term outlook.
This type of analysis was instrumental in shifting the focus from growth to value in 2000, as well of the shift in favor of growth at the end of the last bear market. The Invesco QQQ Trust tracks the Nasdaq 100. Its RS moved above resistance (line a) in July 1998 as the stock market was in the middle of a correction. It is important to remember that a rising or falling RS does not indicate the trend of the market you are analyzing, just how it is doing relative to the S&P 500.
Its RS stayed above the weighted moving average (WMA) until October 2000 (line b), though before the peak in March 2000, QQQ spent five months above its starc+ band. The RS moved sideways for most of the period from 2003 to 2006 as QQQ rose at virtually the same rate as the S&P 500.
All of the major averages peaked in October 2007, which was the bull market high. QQQ’s RS finally broke out of its multi-year trading range (line a) in August 2007. As the bear market progressed for the next fifteen months the RS was making higher highs (line b) and higher lows (line c). In February 2009, the RS broke through the resistance (line b), and the bear market ended the next month. The RS stayed strong until September 2012, when it dropped below its WMA. It stayed below its WMA (points d) until September 2013.
After the year-long period when QQQ’s monthly RS was below its WMA (box a), the RS began another 30-month period where it was leading the S&P 500. The RS dropped below its WMA in April 2016 but it turned back to positive in July. The rising WMA has been tested several times since 2016, but has stayed well above its uptrend (line b). Though the month is far from over, it is declining sharply and could drop below its WMA by the end of March.
The weekly starc- band for the QQQ was broken two weeks ago but still it was able to close above the 20-week exponential moving average (EMA), which is now at $307.86. A close above the resistance at $324-$328 would be positive. The weekly Nasdaq 100 Advance/Decline line moved back above its WMA this past week.
The weekly RS dropped below its WMA and short-term uptrend (line b) at the end of February. The RS has reached the July 2020 lows and it is now well below its declining WMA. A strong move back above its WMA is needed to signal that QQQ is again a market leader. A failing rally in the RS back to its WMA would be negative. There is stronger support at the long-term uptrend (line c).
From the weekly and monthly analysis of the QQQ, it does not appear that the decline in the Nasdaq 100 and technology stocks is over yet. If the Nasdaq 100 continues to underperform the S&P 500, it may signal a shift in favor of value stocks over growth stocks. In this case, we are likely to see technology stocks and tech-heavy markets underperform through the end of this year.
All sectors were higher last week, led by the Consumer Discretionary Sector (XLY) and the Real Estate Sector (XLRE). The Vanguard Materials (VAW) was one of the top performers, up 5% for the week, considerably more than the S&P 500. VAW overcame the prior high at $169.09 to close at $172.98, with the weekly starc+ band now at $176.68. The rising 20-week EMA at $156.62 is good support.
The weekly RS moved above its WMA on the week ending February 19, and made a new rally high last week. The OBV has turned up sharply over the past two weeks and is positive.
Some of last week’s top-performing ETFs still have negative weekly RS readings. That could be resolved if these ETFs outperform the S&P 500 again next week. I still think the sharply rising interest rates are likely to cause more sharp corrections like those we have seen in the past two weeks. The 30-Year T-Bond yield hit its highest level since November 2019, and now some are looking for the 10-Year T-Note yield to reach 2.0%. The FOMC meets this week.
I will be out for the next two weeks but will periodically update my market analysis on Twitter.
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