It's time to keep a close eye on technology

Key Points

• Technology is about to enter its weakest seasonal period of the year
• The good news is that the Win Rate for the technology sector during this period is slightly favorable (52.6%)
• The bad news is that the overall performance for the sector has been decidedly bearish (-79.4%)
• Avoiding tech only during this period and holding the rest of the time would have outperformed buy-and-hold by a factor of six

Technology seasonality

The chart below displays the annual seasonal trend for the technology sector (using ticker XLK as a proxy). As you can see, this key sector is about to enter a period of general price weakness that extends from the close on Trading Day of the Year (TDY) #167 through TDY #196. For 2022 this period extends from the close on 2022-08-31 through 2022-10-12.

Testing performance results

For testing, our dataset uses the Information Technology sector data from the Fama French database from 1927 to 1990 and then the S&P 500 Information Technology sector index after that. NOTE: Before 1953, the NYSE was open for trading for several hours on Saturday (shhhh!! Don't give them any ideas!). This resulted in roughly 52 additional trading days per year before 1953. For this test, Saturdays are omitted, and I only counted trading days that fell on Monday through Friday.

The chart below displays the cumulative % +(-) for the technology sector held long only during Trading Day of Year #168 through TDY #196 since 1927. 

The table below displays a summary of performance.

A closer look

We can make some general observations regarding technology performance during this particular seasonal period over the past 95 years:

• From 1929 through 1933, the technology sector lost -69.5% during the TDY #167-TDY #196 period
• From 1933 through 2021, the technology sector lost another -34% during the TDY #167-TDY #196 period
• While the overall result has been a net decline of -79.4%, the fact remains that this period has shown a gain (50 times) more often than it has shown a loss (45 times)

The last item is a reminder that seasonality has limitations and that anything can happen during any given year. Nevertheless, the overall performance suggests that investors may be wise to avoid the tech sector or hedge their bets during this late summer/early fall period.

To put things into as clear of a perspective as possible, consider the chart below. The brown line displays the growth of $1 invested in the technology sector on a buy-and-hold basis. The black line shows the growth of $1 invested in the technology sector during all trading days EXCEPT for TDY #168 through TDY #196.

What the research tells us…

In reality, anything can happen with technology stocks in the weeks ahead. Based on the results above, it is a mistake to assume that the tech sector is doomed to decline in the weeks ahead. However, history suggests it is also unwise to whistle past the graveyard and hope everything will work out well between 2022-08-31 and 2022-10-12.