More than 90% of stocks in the technology sector are in a bear market

Dean Christians

2022-06-14

Key points:

90% of S&P 500 Technology stocks are down 20% or more from a 252-day high
After similar signals, the technology sector showed positive returns across all time frames
On a relative basis, technology stocks underperformed the S&P 500 in the near term

What happens when more than 90% of S&P 500 Technology stocks fall into a bear market

Let's assess the outlook for the S&P 500 Technology sector after the number of index members trading down 20% or more from a 252-day high cross above 90%. I will include a reset that requires the number of stocks in a bear market to fall below 20% before a new signal can trigger again.

For only the second time in more than a decade, the number of Technology stocks in a bear market exceeded 90%. Several cases like 2007-08, 2000-02, 1973-74, and 1968-70 maintained a high level of stocks in a bear market for a significant amount of time, especially 2000-02.

Similar signals preceded positive returns

This study generated a signal 16 other times over the past 65 years. After the others, S&P 500 Technology's future returns, win rates, and risk/reward profiles look favorable, especially in the 2 & 3-month time frames. While the 1-year window shows a solid return and hit rate, the z-score is uninspiring. I used the reset condition to identify the first instance. If I exclude it, the results will look less friendly, especially 2000-02.

A relative comparison vs. the S&P 500 shows near-term underperformance

When I compare technology to the S&P 500, the tech sector tends to struggle in the 2-4 week time frames. However, more recent signals look better. The 3 and 6-month windows offer the best relative performance, with outperformance at some point in 12 out 16 instances.

What the research tells us...

Internal trends are unhealthy when the number of S&P 500 technology members trading down 20% or more from a 252-day high exceeds 90%. Sometimes, breadth can be so bad that it's good. Similar setups to what we're seeing now have preceded positive returns for the technology sector, with more favorable results in the 2-3 month time frames. A relative comparison versus the S&P 500 shows the tech sector could underperform in the near term. However, the medium to long-term relative performance looks better, especially in the 3-6 month time frames. While the results look somewhat compelling, the bear market series is one of those indicators whereby one might be better suited to wait for a reversal downward before dipping your toes in the sand. The current environment may be one of those times.