Tech Stocks Flashing 1999 Dot-Com Signal

The QQQ is on pace for a fifth close above its upper Bollinger Band, which has happened just four other times

Apr 28, 2017 at 3:06 PM
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The PowerShares QQQ Trust (QQQ) is a tech-focused exchange-traded fund (ETF) based on the Nasdaq-100 Index (NDX). The QQQ, like the more well-known Nasdaq Composite (COMP), has touched a record intraday high for five straight days, peaking at an all-time best of $136.34 earlier today, amid an onslaught of well-received tech earnings. Against this backdrop, the QQQ is about to flash the same technical signal that preceded the dot-com bust.

Specifically, the QQQ closed above its upper Bollinger Band -- often interpreted as an "overbought" indicator -- for four straight days, and is on pace for a fifth. Since the QQQ's inception in March 1999, there have been just four other signals of this kind, the last occurring on May 31, 2016, according to Schaeffer's Quantitative Analyst Chris Prybal. 

QQQ tech ETF chart


Prior to last year, you'd have to go back to May 2014 to find another five-day stretch of QQQ atop its upper Bollinger Band. The only other two signals both flashed in the month of December, but 10 years apart: in 2009, during the first leg of the recovery; and in 1999, during the dot-com bubble.

While the sample size is relatively small, the QQQ has averaged a loss of 2.9% two weeks (10 days) after these signals, and was higher just 25% of the time at this point. One month (21 days) after a signal, the tech ETF was down 1.1%, on average, and higher just half the time. The "sweet spot," so to speak, came at the three-month marker (63 days), with the QQQ up an average of 12.6%, and higher every single time.

In fact, the QQQ was higher than normal and up at least 75% of the time looking out two months (42 days), four months (84 days), and six months (126 days) after a signal. The average return at the one-year point (252 days) was dragged down heavily by the steep losses suffered during the dot-com bubble burst in 2000, though it's worth noting that the QQQ was notably higher a year after the signals in 2009 and 2014, exceeding its average anytime one-year gain of 7.9%.


QQQ after bollinger band signals


 

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