The Technology Sector Gets More Oversold
Last week, I shared an observation about the technology sector index; "The technology sector is oversold and should trend up to retrace some of the recent downtrend".
The following day the sector attempted to trend back up, and Nvdia, the second largest holding in the tech sector index with a weight of 20%, closed up 11% that day.
The tech index traded up and down from there in a widening range indicating a volatility expansion.
Fast forward to today, the S&P 500 Information Technology closed down -3.78% as the broader diversified S&P 500 closed down -3%. The charge below is an update from last weeks charge. The tech sector is now oversold based on its relative strength and the price trend has gapped down below the lower range of a linear regression. 
In that note, I included a hint that the downside may not yet be over: "
... if this is the early stage of a deeper downtrend, we'll eventually see the tech sector break this recent low." and pointing out that "Looking deeper into the tech sector, the percent of stocks in the S&P Information Technology sector above their 50 day average suggests the average stock is at mid-field, so they could certainly decline a lot more, or this could be the stopping point where they reverse back up." and went on to say "Quantitative mathematical measures of price trends are probabilistic, never a sure thing. We use these measures like a windsock, indicating the sector is now at an inflection point of trending back up and resuming the primary uptrend, or watching for indications of a new deeper, longer lasting downtrend."
Below we've updated the percent of S&P 500 stocks that are trending above their 50 day averages. Last week I had pointed out that 56% of the 500 stocks were still in uptrends, so more stocks could certainly trend down if this is the early stage of a broadening downtrend. Below we see that only 22% of stocks are above their 50 day average, so the participation in the downtrend has spread out.
I highlighted the 22% level above and kept another highlight mark at the 56% level this breadth measure had reached last week so see how much lower it trended. I also added some color at the top and bottom for context. The upper range in red is where most stocks are already above their 50 day average and once it reaches this extreme we watch for a reversal down. The same goes for the lower levels which I highlighted green. The more stocks that trend below their 50 day average the closer we are statistically to a market low.
What does it mean?
The tech sector doesn't look as washed-out as it can get, but it's heading in that direction, so we could see buying demand overcome selling pressure at any time from here.
This year has been a theme of heavy concentration with a few of the largest stocks leading contributing to most of the gains in the stock indexes.
Now those stocks are declining the most, but the rest of the market is entering an downtrend.
Uptrends and low volatility are eventually followed by downturns and a volatility expansion, and that's what we're seeing now.
I believed everyone was already in the pool, so it was a good time to go sit on the side.
So, we were already positioned defensively with our largest positions in U.S. Treasuries and high dividend yielding positions, so we are well positioned for whatever happens next.
Mike Shell is the founder, president, and chief investment officer of Shell Capital Management, LLC, and the portfolio manager of Asymmetry® Managed Portfolios. Shell Capital Management, LLC, is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies. Shell Capital provides investment advice and portfolio management to clients with separate accounts at Goldman Sachs Advisor Solutions with an investment management agreement. The observations shared on this website are for general information only and should not be construed as investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the list. Any opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not individualized advice and is subject to change without notice. Investing involves risk, including the potential loss of principal, which an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but are not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise the implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. If this website contains information regarding options trading, please read the Characteristics & Risks of Standardized Options, also known as the Options Disclosure Document (ODD). Options involve risk and are not suitable for all investors. The views and opinions expressed in Asymmetry® Observations and Asymmetric Investment Returns are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.