There's a long way to go if you want to get bullish on tech valuations

Tech stock technicals have deteriorated significantly. We may not be in an official bear market just yet, but it’s clearly no longer a bull market.

Tech stocks have breached multiple key support levels, 50-day averages have rolled over and even 200-day averages are turning (we care about whether the price is above/below its moving average to gauge price trends, but also the slope of the moving average - a downward sloping 200-day moving average is characteristic of a bear market/downtrend).

But also 200-day moving average *breadth* has deteriorated significantly after a period of weakening (bearish divergence), and is yet to really get to washed out or oversold levels.

Honing in on that last point - probably the thing on many people’s mind is when do you start buying?

At a conceptual/process/philosophy level, that’s going to depend entirely on your approach… e.g. for some people it’s a case of simple dollar cost averaging all the way up and down, for others it’s about riding the short-term waves up and down, and others still (e.g. active asset allocators) it’s about navigating the tides and larger cycles.

I am focused on the latter aspect, and in that respect this is where we get to this week’s chart. The problem with such a clear and significant deterioration in the technicals like we are seeing now is that we are coming from a starting point of historically expensive valuations.

It gets us to that old trope of “valuations don’t matter until they matter“ - and valuations matter a lot when bullish momentum fades and turns to bearish momentum like what we see right now.

The chart also tells us there is still a long way to go if you want to start getting bullish on valuations (a full mean reversion would require US tech stocks to drop a further -30% from here - this is not sensationalism, I don’t do that, this is a statement of mathematics).

Maybe we don’t need to see a full and complete mean reversion or drop in valuations to outright cheap levels, but one glance at the chart below and you can see what’s at stake here. So I would err on the side of caution, unless you’re trying to short-term time the swings and bounces, but even then it’s not clear cut.

So keep an eye on the charts, and maybe take some time out to think about your process and overarching strategy (and if you don’t have one, that’s a good place to start!).

Topdown Charts is a chart-driven macro research house specialising in global economics and asset allocation.