We have heard several pundits remark today that the NASDAQ 100 ($NDX) recently breached its 50-day moving average (on a closing basis). We decided to look at recent history to get a sense of whether this is mere sensationalism, or if this observation in fact contains information.
Using the PowerShares QQQ Trust ($QQQ) as a proxy for the NASDAQ 100 Index, we count 139 instances since the turn of the century where $QQQ finished the previous trading session above it 50-day simple moving average, but then closed below this level the next day (excluding Tuesday’s occurrence).
We found that a close below the 50-day moving average has in fact foreshadowed below average returns over the very short-term…but that’s all. Specifically, as indicated in the following table, we observed that average and median returns one day, two days and one week after the signal lagged random results. However, we also found that investors, on average, reaped outsized returns two weeks and one month after such violations (review our dataset here).
Given this indicator’s poor showing for horizons beyond a week out, and despite any superflous media coverage that might imply that this event is material, we can not read very much into this $QQQ’s recent trip to south of its 50-day moving average. Thus while historical precedent points to a bit more weakness from current levels, we do not expect the break of the 50-day SMA to mark a protracted inflection for the sector.
With that said, we do expect U.S. tech shares to lag their international counterparts through the summer. This view is driven by our momentum reversal framework, which attempts to quantify investor sentiment.
In the end though, we are reticent to get overly bearish on Tech at present, and are instead inclined to dismiss the 50-day moving average as a stand alone investment timing indicator (though we concede this system might have some value to swing traders). Not unlike the Hindenburg Omen and the death cross, the publicity garnered by the story is not validated by the data.
With that said, $QQQ has bested $SPY by 925 bps year-to-date (excluding dividends), and so a breather may in fact be due. However, we will need more reliable indications that a turn is upon us before we are willing to throw in the towel on the third best performing U.S. equity sector since the Great Recession (Consumer Discretionary currently sits atop this list, and Industrials rank second).