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Managing Editor’s Note: Today, we’re hearing from our contributing editor Mike Burnick in his weekly feature.
Mike is a trader and senior analyst at TradeSmith, where he runs two trading-for-income services… Constant Cash Flow and Infinite Income Loop.
Each week, he brings you the ideas, tools, and research coming out of TradeSmith… which uses data and computing power to help you spot opportunities and manage risk. He has more than 30 years of market experience as a portfolio manager and research director.
Here’s Mike…
Big Tech Is Oversold and Set Up for a Big Potential Rebound
BY MIKE BURNICK, CONTRIBUTING EDITOR, MARKET MINUTE
Midterm election distractions are finally out of the way, and volatility from earnings reporting season is also winding down.
Now, bullish seasonal trends are free to work their magic on the markets, as I mentioned previously in Market Minute.
But the stock market has a lot more going for it than just a favorable turn in the calendar. That’s especially true for tech stocks.
Big tech and the Magnificent 7 stocks have been taken out to the woodshed recently, down 10% in the last three weeks alone.
I chalk that up to sky-high Wall Steet expectations, when even good results just aren’t good enough.
Here’s an updated seasonality chart for the tech-heavy Nasdaq 100 Index.
As you can see, we’re already in the seasonally bullish part of the year, from late October to December. The Nasdaq has been up 90% of the time in this period, posting average gains of 10.6% historically.
But there’s another catalyst at work…
Due to the sharp selloff recently, tech stocks are extremely oversold compared to the rest of the S&P 500 (excluding tech). Take a look.
This chart shows the S&P 500 Equal Weight index – where each stock counts the same, compared to the cap-weighted Nasdaq 100 ETF (QQQ) – where just 10 stocks account for over half the index.
At far right of the chart, you can see how oversold big tech is right now. Nasdaq has underperformed the S&P equal weight index by 11.5% year to date!
Notice, this isn’t the first time big tech has been this oversold compared to the average stock.
Twice in the past year, big tech has been oversold like this compared to the equal weight index, and five times over the past three years.
And what happened next was a major rebound rally in big tech every single time.
In fact, Nasdaq turned around to outperform the market by about 30% on average after being this oversold!
Bottom line: Stocks are oversold, but are now in a seasonal sweet spot for gains. Big tech shares are down even more lately. But they could be setting up for an even bigger rally in the weeks ahead.
Good investing,
Mike Burnick
Contributing Editor, Market Minute