What The Topsy-Turvy Tech Sector Could Mean for 2018

While tech stocks are leading the charge higher today, last week things went a bit topsy-turvy, as one of the best sectors of 2017 took a spill. Not only did it send up an alarm that sounded before the dot-com bubble burst, but Nasdaq-100 Index (NDX) buying climaxes spiked to the highest in nearly six months. Below, we'll take a look at tech-sector performance after these signals, and how stocks could perform heading into 2018.

Buying Climaxes Spike

Of the 107 equities in the NDX, 12.1% last week experienced a buying climax -- when a stock hits an annual high during the week, only to end the week lower. That marks only the second time in 2017 when this percentage topped 10%, and only the fourth signal since the start of 2016. In fact, these signals have become less frequent since 2013, in which there were six signals, In 2014, there were just five signals, and that dwindled to four in 2015. Since 2005, the only year that didn't generate a signal was 2008, when the stock market was in the throes of the financial crisis.

NDX Performance After Past Signals

Since 2005, in fact, there have been 36 other times that at least 10% of NDX stocks made a buying climax. The index was down 0.3%, on average, a week after these signals, and was higher just 50% of the time. That compares to an average anytime one-week gain of 0.5% for the Nasdaq-100, looking at data since 2005, with a win rate of 60%.

In fact, the NDX has underperformed at almost every checkpoint, looking six months out. However, the average three-month post-signal gain of 3.4% is slightly bigger than usual, as is the 83% win rate four months after a signal. And volatility tends to be lighter than usual after signals, as evidenced by the Standard Deviation columns below.

Signals During This Bull Market

But, looking at data since just 2009, when the current bull market started, the returns have been much more promising. There have been 29 other signals in this time frame, and the Nasdaq-100 has outperformed over the intermediate-to-long term. Two months after signals since 2009, the NDX was higher 82.8% of the time, with a stronger-than-usual average gain of 2.4%. It's essentially the same story looking out six months after signals since 2009, with the NDX higher nearly 90% of the time at the four-month marker.

And, six months after the September 2016 signal, the index was up a whopping 15.2%. Likewise, in the six months after the December 2016 signal, the NDX skyrocketed a whopping 23.6%. So, it's safe to say that the 2016 signals preceded big-time gains for tech stocks.

As Schaeffer's Senior V.P. of Research Todd Salamone advised earlier this week: "continue to use call options to participate in the record-breaking equity rally. Call options give you leverage, and it is an outstanding way to minimize your dollars at risk amid uncertainties on both the political and economic fronts."