More tech stocks try to make longer-term recoveries

Key points:

• A few weeks ago, fewer than 25% of Technology stocks held above their 200-day moving averages
• That has since recovered to neutral territory
• Similar reversals preceded consistently positive returns, but it would be better if we saw a thrust in buying interest

Tech stocks struggling to hold long-term uptrends

Last week, we saw that Nasdaq stocks had staged a recovery, at least in terms of the percentage of them rising to 52-week highs versus those falling to 52-week lows.

While the Nasdaq is considered a tech index, that's not entirely accurate. Even so, there has been a recovery in long-term trends, specifically among Technology stocks. After fewer than 25% of Technology sector stocks were trading above their 200-day moving averages, enough recovered so that most of them were above their averages.

Part of the reason why we've seen a quick change is because so many of the stocks have been hovering right around their 200-day averages. As stocks have gyrated in recent months, those averages have flattened out, and more stocks are popping above and below them as prices whip back and forth.

It's generally better for Tech stocks if we see a thrust with more than 60% of them trading above their 200-day averages. So far, it's been hovering below 60%, which is what an unhealthy market does. We can see from the chart above that the total return on Technology stocks since 1952 was only 7.7% when the percentage of members was neutral, between 40% - 60%.

When it was below 40%, we got the opportunity to enjoy oversold snapbacks. When it was above 60%, the zone where the stocks saw their best annualized returns, it coincided with periods of positive momentum. We have neither right now.

Still, let's take a look to see how the sector performed when there was a quick cycle from fewer than 25% of members above their long-term averages to more than 50%. The table below shows every signal over the past 70 years. Returns in the table use the total return (including price gains and dividends).

The fact that we just cycled up from an oversold extreme helped forward returns significantly. The Tech sector's median return over the next 2 months was more than 2 standard deviations above random, and its consistency improved with each time frame. Over the next year, the sector saw a positive return after 23 out of 24 signals, though the exception was an extreme one.

What the research tells us...

The selling pressure this year, especially in stocks that inhabit the Nasdaq exchange, including Technology stocks, has been extreme. We've now seen a modest recovery, suggesting the worst could be over. But it's not a strong signal. We haven't seen an opposing reaction, a multi-day move with an overwhelming amount of buying interest. So far, it looks like an oversold relief rally, and while returns after similar moves were positive, it would be better if we see more of a surge in interest among buyers.