Quick and Severe Selling in Tech

The quick and severe drop in stocks over the past few days has hit Discretionary and Tech stocks especially hard.

More than 40% of Discretionary stocks fell below their Bollinger Bands as of Wednesday, a sign of high volatility. When XLY was in a strong uptrend with a rising 200-day moving average, this typically led to a quick bounce, then chop, before a more lasting recovery per the Backtest Engine.

The same goes for when there were 5% or fewer stocks holding above their 10-day moving averages.

Tech stocks have been getting much of the attention, and we see similar behavior there, with more than 40% of stocks in the Nasdaq 100 plunging below their volatility bands.

After other signals, the Engine shows that there wasn't as pronounced a tendency for a quick bounce, but medium- to long-term returns were stronger. Over the next 6 months, there were no losses, and QQQ's average return was a robust 16%.

If we look at each occurrence, we can see that it typically didn't pay to buy this first dip. Almost always, QQQ either failed with a much lower low or at least tested the initial panic low in the days ahead. When QQQ bounced immediately, it typically failed. The most sustainable rallies happened after maybe a small bounce over several days, then a test of the initial low a week or two later.