February's Tech Stock Blues
By Michael Carr
Editor, Precision Profits
Banyan Nation,
Tech stocks led the market higher in January — which is typically the case. January is historically a strong month for the tech-heavy Nasdaq-100 Index.
But February tells a different story.
Invesco QQQ Trust (Nasdaq: QQQ), which tracks the Nasdaq-100 Index, began trading in March 1999. Since then, the exchange-traded fund has delivered its weakest performance, on average — in February.
QQQ declined in that month about 60% of the time since it began trading. There is only one other losing month over that time — September (with a win rate of just 44%).
Many analysts wonder why February is so weak.
We could speculate that it’s related to lower-than-expected earnings that are reported in the last weeks of January and early February. Other popular arguments for why stocks sell off include portfolio rebalancing and taxes.
These explanations all make great headlines and can be spun into compelling narratives. But not one of them is likely to be true.
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Understanding QQQ’s Weakest Month
The reason QQQ declines in February (or in any other month) is because there are more sellers than buyers. When sellers act with greater urgency than buyers, prices fall.
This seems to happen quite often in February. Knowing that, we should think about defense for our portfolio.
That’s especially important in 2024. In presidential election years, QQQ has a tendency to trade in a relatively narrow range from February through April. This coincides with the primaries and could reflect uncertainty about who the nominees will be.
I know this year is different. We think we know who this year’s nominees are. But we still have a lot of time before the election. Neither presumptive nominee is especially popular. It’s possible someone other than Biden or Trump could be on the ballot in November.
Aside from it being a presidential election year, we see another pattern suggesting a pullback…
Will Tech Stocks Pull Back in February?
Adding to likelihood of a decline in tech stocks is QQQ’s big gain in January. In previous years after a strong start, QQQ was down 58% of the time. It’s been the worst performing month of the year after a big gain in the previous month, losing an average of 2.2%.
Now, none of this means tech stocks will certainly fall this month. There were a few times when gains followed January rallies. But it’s best to prepare for a pullback in the market leaders.
If you’re bullish on long-term opportunities in the tech sector, weakness could signal a buying opportunity. On the other hand, if you’re bearish on the economy for 2024, or believe stocks are overvalued, now could be a good time to secure profits.
Of course, the seasonal tendencies pointing to tech stock weakness should be confirmed by other indicators.
Remember that prices fall when sellers are acting with urgency. This means we could see a shift to bearish sentiment before market weakness.
While economic news has been good, that could change as soon as tomorrow when the unemployment report is released. Stay tuned to Banyan Edge for timely updates as I closely monitor the ever-changing market.
Michael Carr
Editor, Precision Profits
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