The broader stock market has seen increased turbulence over the past couple of months. The area of the stock market where investors felt this most severely was the large-cap technology stocks as represented by the popular PowerShares QQQ ETF (NASDAQ:QQQ). It is my sense that the QQQ ETF has plenty more downside in 2019 and more volatility for active investors and traders to feast on.
Before we look at a couple of charts for perspective on the large-cap technology stocks, it is important to understand their weighting in the S&P 500. Until recently the technology sector made up around 27% of the entire S&P 500, with the bulk of that made up of just a handful of mega-cap stocks.
Since the S&P 500 did some sector reshuffling a couple of months ago, the tech sector is now about 20% of the index, but most institutional investors that I speak with still see some of the stocks that recently got reclassified as technology stocks. In short, tech remains by far the largest part of the S&P 500, and if these stocks are under distribution it is difficult at best for the S&P 500 to stage any lasting rallies.
QQQ ETF Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
On the longer-term multiyear weekly chart, we see that the QQQ ETF topped out in August of this year but did not trip and fall until early October. Since then the ETF has corrected roughly 16% and now sits at the top of the longer-standing up-trending channel as marked by the two green parallels.
Over my thus-far 21-year career as a trader and investor I have found that stocks and ETFs generally have a strong tendency to mean-revert to their longer-standing trends. Note that the QQQ ETF in May 2017 began to overshoot its long term channel. This is to say that in my eye the entire rally from May 2017 until October 2018 was an overshooting move that ultimately will likely see these stocks mean-revert back into this channel.
The lower end of this channel currently sits around the low to mid $130s, which from current levels is about 15% to 20% lower.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart, we see that for now the QQQ ETF has a horizontal support area around $155 to $160. This area could for now and into year-end offer good support. Ultimately however I see the QQQ ETF failing below there and gravitating toward the lower end of the aforementioned longer-term up-trend.
Active investors and traders looking to prepare for 2019 could begin legging into some bearish positions in the QQQ ETF, expecting to gain the bulk of those downside gains over the course of the next six to nine months.
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