What tech’s choppy action means for stocks this week, according to this 20-year analysis

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Early equity futures action on Monday suggests Wall Street will extend last week’s strong rally.

It’s certainly been choppy, as worries about higher bond yields have done battle with hopes for strong corporate earnings, particularly from big tech.

Indeed, after dropping a little more than 5% in the week beginning April 15, the Nasdaq 100, chock full of those large technology company names, rebounded about 4% last week. It was the best week for the broader market since early November.

Such bouncebackability (yes, it’s a thing ) should be a good sign for a market. It suggests that investors can absorb, rationalize and discount setbacks, and are eager to buy the dip.

But short term traders should be wary. Bespoke Investment Group has run the numbers on such recoveries and found it does not augur well for this week’s action.

Since the mid-1980s, there have been 40 two-week periods where the Nasdaq 100 fell four percent or more in one week only to rise four percent or more the next. The table below shows the 16 times it has happened over the last 20 years, not including last week.

“It’s worth pointing out that the week after these two-week ‘drops then pops’ of 4% has not been great historically,” says Bespoke.

“As shown, the Nasdaq 100 has actually averaged a one-week drop of 1.38% in week three with declines each of the last eight times this has happened since late 2018.” Bespoke adds.

Why, might the market drop back again? Well, it could be argued that instead of a quick bounce being a sign of strength, investors may consider such volatility an indicator of weakness. After all, is it really comforting to see a $2 trillion company like Nvidia shed nearly 14% one week and climb more than 15% the next?

Indeed, moving to the S&P 500 index, Jonathan Krinsky, technical strategist at BTIG, notes that the barometer now faces a tough time around the 5,120-5,130 range. which is the confluence of the 20- and 50-day moving averages, and the recent downtrend.

“We suspect it fails there and turns lower, but should it close above that bulls would have to be respected,” Krinsky adds.

Still, Krinky’s often bearish, so let’s finish with a bullish take on recent market action. Tom Lee, head of research at Fundstrat says that the latest rally is a sign that the “buy the dip regime remains in effect.”

“As we exit April, the rally of the past week has bolstered our confidence that the worst of the selling is done, and thus, we believe probabilities favor stocks to stage further gains in May,” says Lee. His colleague Mark Newton thinks a move to S&P 500 5,212 is underway, which if achieved puts 5,400 in bulls’ sights.

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