We’ve seen this before in Tech – What happens next?

“Isn’t life a series of images that change as they repeat themselves?” – Andy Warhol

Tech stocks have been beaten up quite a bit over the past couple of weeks.  The Nasdaq 100 Tech Index (NDXT) is down 7% since April 1^st.  The Fed continues to taper, with the end of QE in sight, and concern over valuations are growing.  With Q1 earnings upon us, and forecasts of lower Corporate profits looming, there’s legitimate cause for trepidation with Tech stocks.  Will the bloodletting continue?

At times like these, there’s no better gauge for what is likely to unfold next than historical precedence.  Specifically, capturing when we’ve seen environments like this in Tech stocks historically and what happened next gives us a range for the likely outcomes today.  That’s not to say that we’re suggesting the last few months in Tech stocks is exactly similar to periods historically.  The circumstances surrounding each environment historically varies and sometimes widely, but investors reactions to these periods is often consistent and understanding how they are likely to react once again is invaluable.

Pulling together an objective, historical precedence for each investment decision is not something most investors have been able to incorporate effectively in the past because of the time commitment to do so.  EidoSearch now does this for our clients in a few seconds.  So, let’s investigate.  When have we seen similar environments in the trading of Tech historically and what typically happens next?

We looked at the YTD price of the Morningstar Technology Index, with history dating back about 25 years, and found 21 similar instances of the current 3 ½ month price trend.   The average return of all 21 in the next one month following the current price trend is 2.7% and the Tech Index is up 71.4% of the time.  This is a positive projection, and our market call is for a positive move in the next month, but there’s more to the story and the range of outcomes in this study are important.

Just focusing on the six instances historically that are down in the next one month, they are all down at least 5% and in the summer of 1996 it was down 13% (best depicted by the last chart below).  This is a wide range for a one month period, and although the projection is positive based on the average outcome, the risk profile is not as appealing.  The numbers suggest we tread lightly, but of course putting these signals (and the underlying analytics available in EidoSearch) in the hands of an experienced investor makes this data much more meaningful and in most instances actionable.

Charts below.

YTD price trend in the Morningstar Technology Index

21 most similar historical instances of the current price trend, and the one month forward return of each

Projection chart showing the wide range (orange bounds) of potential outcomes in just the next one month forward period based on historical precedence.

Replicating the Market Call in EidoSearch (Subscribers Only)

• Go to New Search tab and click “Indices” in the drop down (top button to the right)
• Type in $MST as the symbol and hit Enter
• Then hit the YTD button at the top of the chart
• Hit “Search One” button at the bottom of the chart to search this current trend just against the Tech Index’ history
• By clicking Table, you can view the dates of the 21 most similar instances of this current price trend