A short but compelling window for technology stocks

Key points:

• The technology sector has shown a long-term tendency to rally during certain times of the year
• One of the more favorable short-term periods is about to begin
• Traders can play this period using the XLK fund

A winning 7-day window for tech stocks

Tech stocks are entering a short-term supercharged seasonal window within a longer-term positive seasonal bias.

The chart below displays the annual seasonal trend for the Technology Select Sector SPDR Fund (XLK), an ETF that tracks the S&P 500 Technology Select Sector Index.

The period we will examine extends from the close on Trading Day of Year (TDY) #207 through the close on TDY #214, a total of seven trading days. For 2022, this period will extend from the close today, October 27, through November 7.

The chart below shows the cumulative percentage growth if invested in the technology sector every year during the seven days described above, starting in 1953. For testing purposes, we use the Fama French technology sector index through 1990 and the S&P 500 Information Technology Sector total return index after that.

During these short windows, tech stocks rallied during 47 out of 69 years. But the most impressive thing is the size of the gains during positive years relative to losses during negative years. There was a very positive skew to the returns.

Real-world trading using an ETF

The purest trade for this tendency is the Technology Select Sector SPDR Fund (XLK). The chart below displays the cumulative percentage gain for XLK held only TDY #208 through TDY #214 each year since 1999.

Since its inception, the fund rallied 19 out of 23 times and sported much larger gains during positive years than losses during the few negative ones.

The table below displays XLK's year-by-year performance during the TDY #207 thru TDY #214 period. 

For anyone considering an options trade related to this tendency, the Invesco QQQ Trust (QQQ) is highly correlated to the technology sector. Options trading is much more liquid, with sharply higher volume and much tighter bid/ask spreads than XLK.

What the research tells us…

As we will discuss in a future article, the technology sector has a long historical tendency to be "streaky," i.e., to advance sharply in a short burst during particular times of the year.

The caveat with seasonality is that there is no guarantee that the latest time around will work out as hoped. Nevertheless, some short-term traders may find the historical results compelling.