This signal suggests the bear market in technology is over

Dean Christians

2022-08-19

Key points:

S&P 500 Technology stocks in a bear market cycled from > 90% to < 50%
After similar reversals, the sector was higher 89% of the time a year later
On a relative basis, the S&P 500 Technology sector could underperform the S&P 500 in the near term

Technology stocks in a bear market reversed from an extreme level

The S&P 500 Technology sector has ripped higher since the June low, outperforming the S&P 500 by over 500 bps. I'm not surprised as the group had more than 90% of its stocks in a bear market as of June 30th, the highest level of any sector. On Thursday, the number of S&P 500 Technology stocks in a bear market dropped below 50%.

Let's assess the outlook for the S&P 500 Technology sector after the number of S&P 500 technology stocks trading down 20% or more from a 252-day high cycle from > 90% to < 50%.

Technology stocks in a bear market reversed lower in only 34 sessions, marking one of the shorter number of days to recover in history. At the time of the cross below 50%, the indicator had spent seven sessions above 90%, which is brief compared to other instances.

Similar signals preceded positive returns 89% of the time a year later

This study generated a signal 18 other times over the past 65 years. While returns and win rates look solid, we don't see any time frames with a z-score that shows significance. Drawdowns were relatively tame except for the July 2000 signal, which occurred near the early stages of the Dotcom bust.

Suppose I apply the signals to the S&P 500. In that case, the results look excellent, especially the z-scores across medium and long-term time frames. So, except for the July 2000 signal, what's good for technology is good for the broad market.

When I compare technology to the S&P 500, the sector tends to struggle in the first few months, which was the case in my previous note that highlighted the cross above 90%.

What the research tells us...

The technology sector has staged an impressive recovery from a severely old condition. The reversal in the number of technology stocks in a bear market bodes well for the industry and the broad market. If we compare technology to the S&P 500, one should be mindful that the sector could underperform the S&P 500 in the near term.