Do declines in tech stocks drag the S&P 500 down?


As we’ve been mentioning in our daily thoughts on the U.S. stock market, the tech sector has gotten a little too far ahead of itself. Its recent rally has outperformed that of the S&P’s and other sectors’. This is normal for bull markets. Every bull market needs its “story” stocks (“we’re changing the world, this is a trillion dollar industry” blah blah blah). Tech has been the story sector since the 1980s.
Perhaps the tech sector (etf XLK) will mean revert and make a small correction. Who knows. We’d like to see if declines in the tech sector preceded any of the S&P’s small corrections since this bull market began (March 2009). If tech falls before the S&P, then perhaps we can use tech declines to predict the S&P’s small corrections.
*We used the S&P’s start dates and end dates for corrections.
*The correlation between the S&P and tech (NASDAQ) was very random in the 1990s for one simple reason. During the 1990s (and especially the late 1990s), tech stocks would often rally while the broader Dow Jones or S&P would fall! This is because many investors at the time believed that “new economy” tech companies would annihilate “old economy” brick and mortar companies. So the thinking was “what’s good for tech stocks must be bad for non-tech stocks”.
*We used XLK instead of NASDAQ because not all NASDAQ stocks are tech stocks.

November 3 2015 – February 11 2016

The S&P fell 14.4% during this time. Meanwhile, XLK (tech sector ETF) actually made a double top on December 4, one month after the S&P had already topped!
Here’s XLK’s chart.

May 20 – August 24, 2015

The S&P fell 12.5% during this time, and most of the decline happened from August 19-24. Once again, XLK made a double top on July 20 (the S&P was 1% away from making a double top as well).
Here’s XLK’s chart.

September 19 – October 15, 2014

The S&P fell 9.8% in a vertical line. The tech sector peaked and bottomed on the exact same days as the S&P. XLK fell 9.9%, identical to the magnitude of the S&P’s decline.
The following is XLK’s chart.

January 15 – February 3, 2014

This was a very small correction in which the S&P only fell 6%. Tech’s decline completely mirrored the S&P’s decline. XLK fell 5.9%.
This is XLK.

May 22 – June 24, 2013

The S&P made a 7.5% correction while XLK made a 7.3% correction. XLK’s price moved in lockstep with the S&P’s price movements.
Here’s XLK during this correction.

September 14 – November 11, 2012

This was a very interesting case. The S&P fell 7.9% while the tech sector fell 14.2%! The tech sector fell in earnest while the S&P almost made a triple top from September to mid-October.
This correction was driven by the bursting of Apple’s bubble. Apple soared in late-2011 and 2012. After a massive run up, Apple’s stock finally started to crater in September 2012. Apple’s crash caused the tech sector to lead the S&P’s correction.
First is XLK’s daily bar chart, 2nd is Apple’s weekly bar chart.

April 2 – June 4, 2012

The S&P fell 10.9% while XLK fell a similar 11.6%. XLK’s individual waves were very similar to the S&P’s individual waves during this correction.

2011

This was an interesting case in which the tech sector led the broad stock index’s decline. The S&P made a small correction from mid-January to mid-February 2011. Then it rallied to a new high before making a big correction from early-June to early-October 2011.
However, XLK peaked in mid-February 2011! Tech made a small correction with the S&P from mid-January to mid-February. But in the subsequent rally, XLK failed to make a new high while the S&P did. From top to bottom XLK fell 17%,  which was a few percent less than the S&P did.
This is XLK.

April 26 – July 1, 2010

The S&P made a big correction (17.1%). Tech’s correction began and ended on the exact same dates. XLK also fell 17.1%.

January 19 – February 5, 2010

The S&P fell 9.2%. However, XLK led this correction. The tech sector started to fall since January 5, even though the S&P went up until January 19. XLK fell 11.1% (more than the S&P).

June 11 – July 8, 2009

After rising a lot from the March 2009 bottom, the S&P made a 9% correction. XLK made a 7.9% correction that started and began on the exact same dates.

Bottom line

As you can see, the tech sector cannot be used to predict the S&P’s small or big corrections.

  1. Sometimes tech’s decline would lead the S&P’s decline.
  2. Most of the time the tech sector and the S&P would fall together.
  3. Sometimes tech would make a double top or go higher even though he S&P had already begun its correction.

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