Calling the bottom in the tech-sector meltdown isn’t easy, even after a $5.5 trillion wipe-out, yet there are some signals giving investors hope.
Tech stocks have been hammered this year as rising interest rates, slowing economic growth and soaring inflation form a perfect storm of negative catalysts. That’s hurt everyone from retail investors who loaded up on Cathie Wood’s Ark Investment exchange-traded funds last year to deep-pocketed asset managers who invested in Apple Inc.
The price charts paint a dire picture: The tech-heavy Nasdaq 100 Index just capped its seventh straight week of declines, the longest such streak since 2011, and has shed nearly 30% from its peak last year. The U.S. trillion-dollar quartet of Apple, Microsoft Corp., Amazon.com Inc. and Alphabet Inc. has led the charge lower in the latest leg of this selloff.
Yet a number of investors are starting to see a light at the end of the tunnel. The Nasdaq 100 now trades for about 20 times its estimated forward earnings — in-line with long-term averages — as frothy valuations built up during the pandemic recede. The Philadelphia Semiconductor Index, home to chipmakers including Intel Corp. and ASML Holding NV, trades at about 15 times expected earnings for the next 12 months, well below a peak of 24 hit in early 2021.
“It’s hard to be patient when there’s been so much carnage. But the pain should end, possibly soon,” said Jordan Stuart, client portfolio manager at Federated Hermes. “Our recommendation is growth investors need to be ready.”
Last week, Jefferies strategists turned bullish on the information-technology sector, saying in a note that a “dash for cash” by investors discounting extreme interest-rate scenarios “has been more than reflected in the compression of market multiples.”
The stock market, as measured by the S&P 500 Index SPX, +0.01%, got off to a rocky start this week. But that produced enough of an oversold condition that buyers stepped in and have taken the benchmark index all the way back to the top of its trading range, at 4700 points.
The lower end of the trading range is 4500 (see the accompanying chart, below), although there is also support at this week’s lows, 4530. SPX has tried many times to break out over 4705 and hold those gains but has been unable to do so. But market internals have improved somewhat, so maybe this time it will do so.
The extreme volatility that has been on display within the trading range has pushed the 20-day historical volatility (HV20) of SPX up to a historically large 21%. That is a sell signal in itself. Only if that volatility begins to retreat (falls below 15%, say), will this sell signal be terminated.
Equity-only put-call ratios have continued to rise — until yesterday (December 22nd), when they plateaued a bit. However, our computer analysis programs are still “saying” that these ratios are on a sell signal. Obviously, they are quite high on their charts, meaning they are oversold.
So a potential buy signal exists, but we need to see them begin to trend lower (and for the computer analysis programs to agree) before we can say that they are on buy signals.
Market breadth was abysmal when the market was going down. But it has recovered strongly with the rally since Monday, and now both breadth oscillators are on buy signals. We had a contingent bull spread recommendation in place and those contingencies have been fulfilled.
These oscillators had reached extreme oversold conditions in late November and early December — extremes not seen since the pandemic selling of March 2020. That sets the stage for a strong buy signal, and it is usually the second such one that is the “true” buy signal. This current signal is that second one, so this is promising for the bulls. For the record, the cumulative breadth indicators are nowhere near their old highs.
New 52-week lows have continued to outnumber new 52-week highs, even with the market rallying back this week. This situation could reverse in the coming week, but so far it has not. That means this indicator is still clinging to a sell signal. In a broad sense, it is not a constructive thing for SPX to be right at its highs, yet there are more stocks making new 52-week lows than making new 52-week highs.
The implied volatility indicators are mostly bullish, but not totally. First, the VIX “spike peak” buy signal remains in effect. Action was wild in VIX, though, as it exploded to above 27, then closed below 23 on one day (Monday, December 20th).
It is the trend of VIX that represents something of a problem. That is, VIX has continued to close above its 200-day moving average, which is just below 19 and going sideways. VIX has nearly fallen to that level for the first time in a month (note the box on the accompanying VIX chart). A clear close below that 200-day MA will be another bullish sign for stocks.
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