How to Assess Sharp QQQ Pullbacks

The tech ETF has dropped 3% or more 16 times in 2020

Sep 18, 2020 at 2:06 PM
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This space was supposed to have been dedicated to something entirely different a week ago. Instead, the recent broad-market correction stole the show, sending investors scrambling and pouring cold water on Wall Street's best August in years. It was an especially precipitous plunge for some of 2020's tech darlings such as Tesla (TSLA), Apple (AAPL), and the Invesco QQQ Trust Exchange Traded Fund (ETF) (QQQ). Elon Musk and Tim Cook have received enough attention lately, so we're going to instead look at the QQQ's Labor Day weekend to forget.

On Wednesday, the QQQ scored an all-time high of $303.50. Emblematic of 2020, a day later the QQQ promptly shed 5.1% on Thursday, September 3, in a fit of profit-taking. By the close, the tech-focused ETF had drifted all the way down to its 20-day moving average, which coincided with a 161.8% Fibonacci retracement line from its March lows.

Fast forward past the socially distant pool parties of Labor Day to Tuesday, September 8, and QQQ gapped lower by 4.8%, breaching those aforementioned levels from Friday. Now, as the holiday-shortened Labor Day week comes to a close, the damage appears to be contained by QQQ's 50-day moving average, which happens to coincide with the $270 level, a strike that is home to peak open interest at the weekly 10/2 expiry.


But those bookended Labor Day weekend trading days still sting. According to Schaeffer's Senior Market Strategist Chris Prybal and Senior Quantitative Analyst Rocky White, the QQQ has now dropped 3% or more on a single trading day, 16 times in 2020. For contextual purposes, there were four 3%-plus drops in 2019 alone. Compare that to 2008's figure of 22 3%-plus drops. And just to drive home the pure insanity of the late 90's tech selloff, 2000 featured a whopping 57 drops of 3% or more from the QQQ.

Overall, there have been 243 total occurrences of the QQQ declining by 3% or more. The short- and long-term returns following such a signal have been lackluster at best; a muted 0.5% gain two weeks later and a negative 4.2% return 252 days out. Compare that to the anytime returns, and it’s clear that outsized moves to the downside seem to beget more choppiness in the days ahead.

However, since the QQQ's inception in March 1999, there's been dramatically different market environments during those 21 years. When sorted by time period, the average returns from the QQQ following a 3% drop are more encouraging during this recent market environment between 2009-2020. As you can see below, after a 3% daily decline from the QQQ, the period between 1999 and 2001 marked decidedly poor performance. And while the 2002-2008 returns improved post-signal, they're not nearly as strong as the returns from the most recent breakdown we find ourselves in. In this current environment, the QQQ was higher by 4.1% 21 days, or one month out following such a signal. Those numbers get progressively better the longer the ETF is distanced from that drop. Perhaps that's a silver lining to all the hand-wringing about the 2020 volatility.

Signals like these should serve as a stark reminder that QQQ choppiness –to either direction -- is here to stay. It won’t magically disappear if a vaccine emerges, a new president is elected, or the calendar turns to 2021. To hammer the point home with some in-house statistics, QQQ's Schaeffer's Volatility Scorecard (SVS) comes in at 90 out of 100. This means the equity has tended to exceed these expectations during the past year -- a good thing for option buyers. But if there's anything 2020 has taught us -- and that last week reminded us – it’s to expect the unexpected.


Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, September 13.


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