This past week, the QQQQ was up modestly (around half a percent), but the semiconductor stocks (SMH) were up well over 3%. In an article a couple of years ago, entitled the SOX and the Stocks, I showed how outperformance by the semis tended to lead the S&P. Does outperformance by the semis now lead the Qs?
Looking from January, 2003 to now (N = 732 trading days), we find 105 occasions where the QQQQ was up for the week, but not more than one percent. I then performed a median split, looking at modest up weeks in the Qs where SMH was strong vs. modest up weeks in the Qs where SMH was weak. Overall for the sample, the average price change the following week was -.10% for the Qs and -.26% for SMH. This reflects the general tendency we've been seeing for weakness to follow strength. When the SMH has been strong, however, the next five days in the Qs and SMH have averaged .01% and -.05%, respectively. When the SMH has been weak, the next five days in the Qs and SMH have averaged a respective -.21% and -.47%. This suggests that, when the Qs are up modestly and the semis are down, it may be worthwhile to sell SMH.
Interestingly the underperformance following weak SMH weeks has been due to outsized declines during down periods; the absolute proportions of up and down occasions have not significantly differed. In other words, the odds of having an up vs. down week in the Qs and SMH are not impacted by SMH performance. But when SMH is weak relative to the Qs during a modest up week for the Qs, the down occasions are particularly severe.
Outperformance by SMH, such as in the past week, is not enough to give us a positive edge, but pretty much negates any negative edge that we normally see following an up week. Fading strength in the Qs when SMH is even stronger has not been a winning strategy. The lead performance of sectors relative to broad averages is something I will be tracking in upcoming posts.