Gauging the tech move

Traders returning from the holiday weekend got a bit of a rude awakening from the stock market, especially from the tech sector. The Nasdaq 100 (NDX) fell 3.1%, just six weeks after falling 3.7% on July 24, and eight weeks after its July 10 record high:

Those two days were, in fact, the tech index’s biggest down days since December 22. And many traders are probably wondering whether Tuesday is a harbinger of more short-term selling, as was the case in July, or a one-off move.

On Wednesday, the NDX opened in negative territory, pushed into the green for a while, but ultimately closed lower on the day. While bulls may have been disappointed by that loss of momentum, analysis of similar situations may have cheered them up a bit.

To understand why, let’s put Tuesday’s sell-off in context. It wasn’t just that the NDX closed more than 3% lower—it’s done that 344 other times since 1986, and the largest of those losses was -15.1%.¹ Comparing a 3% loss to a 15% loss doesn’t necessarily make much sense.

There’s also the price activity that led up to the event to consider. For example, a big down day that follows a strong, two-month rally may not be comparable to a big down day that follows a two-month sell-off.

One way to more precisely define Tuesday’s NDX sell-off—and also put it in context of the recent market action—is to call it a day that 1) closed down at least 3% but less than 4%, 2) closed below its open, 3) made the lowest intraday low in at least 10 trading days, and 4) closed below the highest close between 34 and 42 trading days ago (i.e., the nine-day window that included the NDX’s July 10 record high).

The NDX has had 71 other days like this since 1986. Overall, it was slightly more likely to close higher the next day as well as five trading days (one week) later—36 times out of 71, in both cases. But in addition to those gains being smaller than average, there was a surprising difference in the index’s subsequent near-term returns, based on whether it closed higher or lower the day after the sell-off day:

In other words, if the NDX closed higher the following day, it was more likely to lose ground over the next five trading days (19 times of 36 times, with an average net return of -0.78%). But when it closed lower the day after the sell-off day, as it did Wednesday, it was more likely to rally over the next five days: 23 out of 35 times, with an average net return of +1.46%.

Market Mover Update: One day after its 4.3% sell-off, October WTI crude oil (CLV4) slid 2% on Wednesday, falling below $69 to its lowest level of the year (see “Slippery oil picture”).

Today’s numbers include (all times ET): Challenger Job Cut Report (7:30 a.m.), ADP Employment Report (8:15 a.m.), Weekly Jobless Claims (8:30 a.m.), Productivity and Costs (8:30 a.m.), S&P Global Services PMI (9:45 a.m.), ISM Services Index (10 a.m.), EIA Natural Gas Report (10:30 a.m.), EIA Petroleum Status Report (11 a.m.).

Today’s earnings include: GIII Apparel (GIII), Land’s End (LE), Science Applications (SAIC), Broadcom (AVGO), DocuSign (DOCU), National Beverage (FIZZ), UiPath (PATH), RH (RH), Smartsheet (SMAR).

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¹ All figures reflect Nasdaq 100 (NDX) daily prices, 1986-2024. Supporting document available upon request.