Was the Tech Stock Slump a 'Buy' Signal?

Steep two-day pullbacks have preceded notable rallies for the Nasdaq

Jun 13, 2017 at 10:31 AM
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Unless you've been hiding under a rock, you know that tech stocks suffered quite a two-day slump from Friday afternoon through yesterday's close. Led by steep losses from Silicon Valley bigwig Apple stock, the Nasdaq Composite (COMP) fell 2.31% in the course of two sessions -- its heftiest two-day slide since early December. However, if recent history is any indicator, the pullback could point to a solid recovery for the Nasdaq.

The COMP has dropped 2.25% or more in the course of two days 14 other times since 2016, according to data from Schaeffer's Senior Quantitative Analyst Rocky White. Nine of those occurred in the first two months of 2016, and there have been just three other signals since the Brexit brouhaha of last June.

Nasdaq after two-day losses

Meanwhile, following these quick-and-dirty drops, volatility tends to ramp up in the short-to-intermediate term, as evidenced by the Standard Deviation rows in the charts below. The next week after a signal tends to be lackluster for the Nasdaq, which averaged a gain of just 0.05% and was higher only half the time. For comparison, the COMP has averaged a healthier one-week return of 0.4% with a 63.6% win rate, going back to 2016. It's worth noting, though, that the COMP was higher one week after each of the last six signals.

The index has also underperformed at the one-month marker, with a much weaker-than-usual average return and a lower percent-positive. Again, though, the Nasdaq was in the black a month after the last eight signals, so the data is largely skewed by the returns from early 2016.

Looking three months after a signal, the Nasdaq was up an average of 7.32% -- that's compared to an average anytime return of 5.77% in the course of three months. The win rate is also in line with the COMP's anytime stats, at 92.3%. In fact, only three months after the first signal of 2016 was the Nasdaq in the red.

nasdaq after steep drops

At last check, the Nasdaq is on the road to recovery, regaining 0.7% to hover just shy of 6,220. However, the COMP has a ways to go before overcoming Friday's record intraday peak of 6,341.69.

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