The Technology Sector Just Collapsed Internally: Breadth Breakdown and Convexity Potential

One of the quantitative tools we use to measure internal market strength—or weakness—is breadth, specifically the percentage of stocks above their moving averages.

Rather than just observing price trends at the index level, breadth gives us insight into the underlying participation driving (or failing to drive) those moves. When breadth deteriorates, it signals internal weakness—and in some cases, sets the stage for asymmetric opportunities.

The Technology Sector Just Collapsed Internally

As of April 3rd, the S&P 500 Information Technology Sector ($SRIT) dropped nearly 7% in a single day. But more importantly, the breadth collapsed:

• Only 5.79% of components are above their 5-day and 20-day moving averages.
• Just 7.24% remain above their 50-day moving average.
• 84% of the 69 tech stocks hit new lows today, compared to just 6% making new highs.

This is not just a sector under pressure. It’s a sector experiencing broad internal breakdown, where sellers have dominated nearly every time frame.

How We Use Breadth to Measure Market Internals

Breadth—like the percent of stocks above their moving averages—is one of our go-to systems for identifying imbalance in market dynamics.

We watch for:

• Clustering of components below short- and intermediate-term averages
• Extreme readings near 0% or 100%
• Divergences between price and breadth

When most stocks in a sector are below key moving averages, it reveals trend exhaustion and potential dislocation.

That’s where convexity often appears.

Convexity in Mean-Reversion

Convexity means small inputs can cause large outputs.

In mean-reverting markets, it often happens after extreme breadth collapses, like we’re seeing now in Technology.

Here’s what creates a convex setup:

• Everyone is already positioned short or de-risked
• There’s little incremental selling left
• Volatility is elevated, increasing potential price movement
• Even a small shift in sentiment or buying demand can trigger a disproportionately large bounce

This doesn’t mean we try to “catch falling knives.”

But when internal measures like breadth hit extreme levels, we recognize conditions where a sharp countertrend rally becomes increasingly likely.

Asymmetry Through Breadth + Convexity

This is where our framework comes together:

• Breadth tells us when downside risk may already be priced in
• Convexity shows how small catalysts could trigger large reversals
• I structure asymmetric trades around this, using weapons like:
  • Call options or spreads (limited risk, unlimited or exponential upside)
  • Controlled position sizing (risk predefined)
  • Option strategies where limited capital risks can express large directional views

The Bottom Line

Extreme breadth weakness in the S&P 500 Technology Sector is a signal. It tells us the selling pressure is broad, relentless, and potentially getting exhausted in the short term. 

That opens the door for asymmetric trades with convex upside potential, especially if even a modest catalyst appears—like improved sentiment, a macro surprise, or short covering.

At Shell Capital, we monitor internal metrics like these daily. It’s one of the ways we pursue asymmetric investment returns by identifying turning points before they show up in index-level price charts.