The Nasdaq 100 Index ETF (QQQ) fell 4.5% since its Feb. 12 peak, compared to 1.3% for the S&P 500 SPDR (SPY), explains Marvin Appel of Signalert Asset Management.

This reflects underperformance by growth stocks generally, and by technology in particular. As a result of the decline since Feb. 12 (circled in the chart below), QQQ has underperformed SPY since its Sept. 2 relative strength peak. If the market continues to sell off, both QQQ and SPY should find support approximately 5%-6% below their Feb. 23 closing prices. (That is, support for QQQ should be around 303, and for SPY around 370.)

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In contrast to QQQ, the equal-weighted S&P 500 Index ETF (RSP) suffered no pull-back at all and recently touched a relative strength peak compared to the cap-weighted SPY (circled in the chart below).

Implications

The pandemic made technology companies the new defensive stocks because they were able to maintain or increase sales and profits while everyone stayed apart from one another. Now that we face the possibility of resuming a more normal lifestyle, investors are less willing to pay a premium for technology stocks. On the other hand, since the underlying economic trends are favorable, they are willing to move to the broader market. This is what we have been seeing since Sept. 2, when smaller companies (IWM and RSP) began outperforming QQQ.

Swings between different areas of the market have been large, and sometimes subject to abrupt but temporary reversals. I continue to recommend SPY to balance out swings between growth and value, and between technology and other sectors. I also recommend covered-call writing with SPY. VIX has been consistently above 20% for a year. Historically, at such high levels of option implied volatility, covered-call writing with S&P 500 Index options has outperformed the S&P 500 itself.

To learn more about Marvin Appel, please visit Signalert Asset Management.