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TECHnicals Highlight Short-Term Volatility Risk...

THE VERDICT IS IN

In case there was any lingering debate as to the influence of technology in the 21st century, the recent outperformance of tech stocks has shattered all arguments to the contrary.  By any metric or interval, the sector's influence is undeniable. 

Here's a glance at the relative performance of the tech-heavy NASDAQ composite to the S&P over the past 9 years:


...it's not even close.

For the sake of context, the "Big Four" (AAPL, AMZN, FB, MSFT) now make up more than 10% of the S&P 500. 


SEE NO EVIL, HEAR NO EVIL, SPEAK NO EVIL

Short of a totally unexpected rejuvenation of anti-trust regulation, there doesn't appear to be any legitimate threat to the strength or influence of technology companies in the foreseeable future.

However, it is worth noting that short term market risks are beginning to flash yellow as a number of factors begin to align. 
  • First off, the overall market is being carried by the strength of tech as other sectors suffer.  Consumer related sectors like retail, biotech and airlines have especially been hit hard over the course of the past weeks and months.  While energy and financials have done better, the concentration of the gains in tech is outpacing even recent history.
  • Secondly, market volatility remains ridiculously low.  The VIX slipped back under 10 this week which suggests that the perceived risk in the market is scant at best.  This is important because markets tend to have the largest price moves - in either direction - when actual events deviate from expectations.
  • Perhaps most importantly, though, is that the big tech names are all over-extended - some staggeringly so.  Of the aforementioned "big four", all but FB have a 20-day moving average variance above 3! (AMZN: 3.60, AAPL: 3.25, FB: 1.21, MSFT: 3.37 ) For context, a 20-day variance above 2 is considered high.  Throw in GOOG's 20-day variance of 1.91 and the picture only gets that much clearer.
Over the course of the past 6 months, the QQQ has had a 20-day variance over 2 a total of seven times.  The mean 10-day subsequent returns for this period were -1.07%.  Currently, the QQQ's 20-day variance is 2.11; should it revert to its 20-day moving average, that would represent a -2.60% move from Friday's close.

A -2.60% move in tech would certainly not spell the end of the world... or even the end of the bull market for that matter.  However, the tremor would most likely reverberate through sleepy vol markets.  It was just last April that the VIX spiked over 70% in just four days when it was at similar levels.

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