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Tech Stocks Have More Room To Go Down

Kwan-Chen Ma profile picture
Kwan-Chen Ma


  • Tech stocks, which swiftly bounced off the -10% territory, gave the market the illusion that the tech sector has been fully corrected.
  • Mainly due to widespread supply shortage and seasonality, Q1 revenue (EPS) has been estimated to decrease by 10% (6%) for an average tech stock.
  • If tech sector is currently valued based on its Q1 financials, tech stocks may see an immediate 8% downside.
  • Partially due to the fading WFH demand, Q2 revenue (EPS) has been estimated to decrease by another 2% (4%) for an average tech stock.
  • As a result, tech stocks may drop another 10% by Q2.

On March 9, the Nasdaq Composite finished the trading session 10.5% below the record it notched in February 12. While the 10 percent threshold for a correction may be arbitrary, it is symbolic in showing that investors have turned more pessimistic about the market and more of the tech stocks. And with a full economic reopening within reach, coupled with a surge in interest rates, investors are rotating out of high growth tech stocks and into value and cyclical stocks. On the timing and the magnitude of the rotation, Mike Wilson, Morgan Stanley's chief US equity strategist, had very specific predictions in a recent note:

"There will be a big shift in the top and bottom quintiles of 12-month price momentum by the end of this month (March). Most of the stocks going into the top quintile are value and cyclical stocks. Conversely, many of the stocks moving out of the top quintile are tech and other high-growth stocks.”

"Based on the technical damage to date, the Nasdaq 100 appears to have completed a head and shoulders top and should test its 200-day moving average," Wilson said. The 200-day moving average of the Nasdaq 100 currently sits at 11,635, representing potential downside of 10% from Friday's close (March 5).

At the eve of month-end, the Nasdaq 100 just closed at 13,138. Although Wilson’s predictions may not realize exactly the way he prescribed, his points are still well taken. In this post, I add more color on the timing and the magnitude of the rotation using a fundamental, bottom-up approach.

Due to the widespread chip shortage, the fading WFH ("Work From Home") demand and the underlying seasonality, the revenue growth for an average tech firm is estimated to drop by 12% in 1H 2021. As a result, the tech stocks may see an immediate 8% drop by Q1

This article was written by

Kwan-Chen Ma profile picture
K C Ma, Ph.D, CFA, is the Eminent Scholar and the Mary Ball Washington/Switzer Brothers Endowed Chair of Finance at University of West Florida. I am the Director of Argo Investments Institute which enables college students to manage real money stock, bond, and option funds. I manage market-neutral institutional hedge funds in KCM Asset Management. I write about stocks, bonds, and derivative strategies, long or short, based on our quantitative processes.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (31)

Shaduc profile picture
Any thoughts: www.youtube.com/...
"standard regression method"

Dr. Ma, thank you again for your sophisticated mathematical analysis. This information is incredibly useful, and not available anywhere else (that I know of).
Kwan-Chen Ma profile picture
@Ponzi Inc haha! nice to hear you. I have much fewer reads (1/8 of usual reads) on this "bearish" piece on tech stocks. I think SA has a bullish bias on all stocks.
Market Map profile picture
The pending "turn up" of the reading / trend of the Conference Board Leading Economic Index has promising implications for higher equity prices. Since 1960, when the "trend" value of the CB LEI has turned up from the "trough", this after falling into negative or red territory, forward 2 and 5 year market returns have been decent. The CB LEI has fallen into negative territory in 2020 , a rare event. https://imgur.com/a/bQ4Iylh

As forward returns shown on chart are for SP 500, the Nasdaq composite / Nasdaq 100 index ( tech sector ) produced even higher forward 5 year returns ( albeit a negative return starting from Oct 1971 resulting from the 1973 - 1974 bear market / inflation induced recessionary period ):

Oct-71 -18%

Oct-75 +151%

Mar-81 +81%

Oct-82 +144%

Mar-92 +117%

Jul-02 +85.7%

Oct-09 + 147%

Also, a large quarterly loss in the duration asset market has just occurred in Q1 2021 ( greater than minus -4.0% ). In looking at past bond market "losses" in absolute terms, quantitative research shows that since the 1960s, when the 10 year Treasury / Vanguard Long Treasury fund VUSTX produced a greater than -4.0% calendar quarter loss, forward two year SP500 and Nasdaq 100 ( with the exception of Mar 99 ) returns have been positive https://imgur.com/a/IDy6PYZ , a statistically significant result.

That would suggest that odds favor a low risk opportunity to buy and hold some SPY / QQQ.
Kwan-Chen Ma profile picture
@Market Map very interesting.
cfranklin profile picture
So nice to read your research!
Ma--sitting long on AMD and waiting for its merger with Xilinx---confused with your picture of this joint venture---Please give all of us many AMD investors some guidance for 2021 into 2022 ? thanks
Kwan-Chen Ma profile picture
@Red702355B sure thing, amd valuation post will be out soon.
SuperPac profile picture
S&P 500 just went past 4,000, a new historic high.

Nasdaq, which had fallen from 14,175 to 12,600+, some 10% - 11%, is approaching 13,500.

This market action is of course preceded by the Biden infra spending announcement yesterday. On top of 1.9 trillion of relief spending earlier, a further 2.2 trillion on infra, part funded by more taxation. (It's reported that another trillion spending announcement is in the offing.)

Trillions being spent like billions, rising taxes. But the market seems to have shrugged it all off today. Even the US 10yr yield is down some 3%. Not worried about all the spending it seems.

May be Cathie Wood will have the last laugh at the expense of all the Ben Graham acolytes. Let's see.
Kwan-Chen Ma profile picture
Look like there are some questions on the stock level, the tech sector index includes the following stocks:
Sighcopath profile picture
@Kwan-Chen Ma Are the stock levels equal? It would be great to know the percentage of each holding. With out knowing how a fund is weighted can be a very poor way to judge the success (or failure) of a fund.
Kwan-Chen Ma profile picture
@Sighcopath yes, you can google the ticker s5inft (of this index) to find the weighting of each stock, it is not equal weighting as I know.
Just yesterday, I read that internet advertising spending is rising and Amazon, Google and Microsoft are hiring for their cloud divisions.

MU just announced excellent results and demand (DRAM and NAND) is expected to be strong throughout 2021 and 2022, at least.

Could you be more precise about which part of tech you expect to pullback?

I can't see any in my portfolio.
Kwan-Chen Ma profile picture
@Fundamental Trader a good question for 76 (stock) answers. I just listed the 76 stocks in this index I used for the proxy of the sector which also overlap completely with QQQ.

I am happy for you for the tech stocks in your portfolio. But I was using the average of the 76 stock forecast financial to derive my conclusion. I need to write 76 articles to identify which stocks may drag down the index. :)

Thanks for the comments.
Micron’s upbeat guidance today for 3rd quarter is forward looking. This thesis is backward looking. Everyone assumes tech is priced in already. Any surprises, however trivial as it may be during other times, here and now, will help inflect the sector upward.
Kwan-Chen Ma profile picture
@Ted Hu Yes, Micro's guidance confirms my previous article on Micron.
In this paper and in any other posts, I always use "forward-looking" analysts forecasts to price the stocks (or sector) in this post.

I agree with you everything is priced in tech now. And I am saying that the entire sector is over-priced in.

Thanks for your good comments.
MTSkyInvesting profile picture
CVNA insiders continue to sell stock at a blister pace. It wouldn't surprise me in the least to find out later there was fraud.
Professor , can I ask when you mentioned tech stock , you mentioned hardware . As only hardware has the nature of commodisation. Software are scalable . No supply shortage issue . And software is more than zoom and wfh . There are open market trade for software . Payment platform is an example .
It’s difficult to do a top down approach. Valuation is an art . And tech is so big to generalise nowadays .
nathanlane profile picture
@heung Look very carefully at his graphs. There is a pattern. Maybe it won't repeat itself, but valuations for software and hardware are very high.
I think the answer is on growth not on price . Eg Twlo was bottomed at 26$ when Uber discarded the earnings it’s communication Cpsaas , it has then has 65% annual growth since then , now is 10 times .
Square was 8$ when Starbucks dropped its card, now its over 230$ . How about crowdstrike , ZS, firefly . Did they grow through the 3% 10-year yield ? Didn’t they go through the US/China trade war ,
It’s on negative rate now , the market is muddy but growth is growth . Cylical is cylical .
Kwan-Chen Ma profile picture
@nathanlane yes, as much I love AMD and Nvidia. They are valued at the high side.
Tech stocks that continue to ring the register will continue to move up. It is the tech stocks that have trouble ringing the register that will stall out!!
Kwan-Chen Ma profile picture
@kevinconnolly Yes, you are talking about momentum now. Tech sector has done so well so pretty much all stocks have been up.
KATCHKE profile picture
with all due respect (because I follow your insights closely), Kwan-Chen, I see the situation exactly in the other way. in fact, it is quite possible we are being set-up for a market 'blow-up'. I quote from an email I sent two days ago to my associate, Stone.

"why are the growth stocks improving across-the-board today, Stone ?

this is because we have two only trading days (including today) left in the first quarter. the effect is called 'window dressing' of portfolios by 'supposedly' professional money managers. so they have been buying what has been 'working' in the last several weeks, such as your sleepy, stodgy Cleveland Cliffs (up two today), to participate with the rising market Dow and S&P. but to compound matters, they are also selling, and refraining from buying, eroding growth stocks under pressure because they are temporarily 'not working'.

this is sometimes taken to an extreme. for example, the portfolio manager who bought FuboTV at 30 seven days ago could sell it quickly near 20 because he doesn't want to look too inept in showing it when the transactions for the first quarter are soon published by his mutual/hedge fund, or sent to his clients. so the guy would rather take a quick loss (honestly ! ) instead of having the 'wrong' buy transactions in print which could well soon turn out to be quite okay. this demonstrates one of the reasons why professional managers can't beat the index funds--because they don't get emotionally whipsawed in the market, compounded with the extra transaction costs to boot ! "
Kwan-Chen Ma profile picture
@KATCHKE Yes, you have a good point there. I am not disagreeing with you. But what I showed is the tech sector valuation effect that we are experiencing for a long time.
Nothing wrong with tech stock, but you gotta make something, we completely ran out of computers here in Australia something about chips
Kwan-Chen Ma profile picture
Good morning! Thanks for the read and look forward to your comments.
In other words market waiting for amazon union vote to cause a destined sell off.
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