Executive Edge

Nasdaq, tech stocks coming out of correction: Here's what recent market history says about rebound lasting

History shows the Nasdaq's drop could recover in three months
History shows the Nasdaq's drop could recover in three months
Key Points
  • September has brought both an all-time high and a technical correction for the Nasdaq Composite Index. 
  • The tech-heavy index is rebounding this week, with recent big losers like Apple and Tesla rising.
  • History says when the Nasdaq sells off as fast as it recently did, investors should not let fear linger.

In this article

September has been a volatile month for the Nasdaq Composite Index. After hitting an all-time high on September 2, crossing above 12,000 for the first time ever, the Nasdaq dropped by over 9% within a week and entered a technical correction.

No surprise: the selloff in the tech-heavy stock market index was led by some of the biggest names in tech. The Technology Select Sector SPDR, also known as XLK and which tracks the stock market's leading sector, also had recent losses greater than 10%.

But this week, the Nasdaq, and some of the hottest technology stocks that have led the recent bull market, like Apple and Tesla, are bouncing back

Will the rebound in the stock market, and tech stocks, last?

According to recent market history, rapid selling in tech and the Nasdaq could present a buying opportunity that lasts.

Tesla shares jumped in trading on Tuesday by 7%, building on a big Monday, which saw the stock pop more than 12%. That's after a drop of more than 20% last Tuesday, Tesla's worst day on record. Mega-cap tech stocks — AmazonMicrosoft, Facebook and Alphabet — all rose between 1% and 2% on Tuesday, though Apple's early gains evaporated on the day of its latest virtual new product launch event.

The Nasdaq index ended Tuesday by rising over 1%, continuing its bounce back from its worst week since March, and the best of the three main U.S. stock market indices. The Nasdaq-100 was up even more. The Dow Jones Industrial Average failed to hold a 100-point morning gain, or extend its 1.2% Monday rally.

Monday's broad market rally was built on optimism about a coronavirus vaccine, but the past ten trading days have been a roller coaster for investors: the Dow, for example, has been down as often as it has been up.

Over the past 15 years, the Nasdaq has dropped by 9% or more in a one-week window on five other occasions.

Following those declines, the index tends to rebound for a lot longer than just a few days. Three months later, the Nasdaq gains an average of 8.7%, trading positively 80% of the time, according to data from hedge fund information platform Kensho.

Tech, as measured by the XLK, jumps by a bigger, double-digit percentage gain, and also has been a positive trade 80% of the time.

After big, sudden selloffs in the Nasdaq and tech sector, both tend to bounce back.

This period overlaps with the U.S. presidential election, which recent history also indicates has tended to be more bullish than bearish for stocks since 1980.  

Some market strategists say it is rational to take some profits from these big winners even amid a rebound.

Tech stocks were in "bubble" territory, Jonathan Bell, chief investment officer at Stanhope Capital, told CNBC's "Street Signs Europe" last week. But he said there are still "so many good reasons" for investors to own Alphabet, Amazon, Apple, Microsoft and Facebook, pointing to their combined outperformance in the wake of the pandemic.

"It's not that these businesses aren't great businesses that are going to carry on going, it is just the exuberance related to them," Bell said.

Amazon announced a new retail target on Tuesday, creating a luxury fashion business called Luxury Stores.

Tesla's rebound came as Goldman Sachs said demand is picking up in China.

"Tesla global weekly app downloads have recently been tracking up on a year-over-year basis, with the most recent full week of global data up about 20%," the firm said in a note to clients Monday, while noting that the company typically has "much stronger deliveries in the last month of each quarter."

Interest in value stocks ticked up amid the volatility in the growth-led market. But some broad indicators of market momentum have been positive, with biotech having its best day since April on Monday, up more than 5%, the IPO market hot with deals like Snowflake pricing higher than original plans, and a major M&A deal in the semiconductor space announced Sunday, with Nvidia paying $40 billion to buy ARM from Softbank.

Nasdaq bull market by the numbers

  • % Off Record High: 8.43% 
  • Since 2016 election: The Nasdaq has gained 112.89%        
  • Since Trump's inauguration: The Nasdaq has gained 99.58%

Source: CNBC data, as of Monday's market close