QQQ Pullbacks Hint at Unpredictable Short-Term Returns

The high-speed sell-off that rattled U.S. stocks during the two-week stretch from late January through early February resulted in a drop of 12.2% for the PowerShares QQQ Trust (NASDAQ:QQQ), measuring from its Jan. 26 intraday peak to its Feb. 9 intraday low. The magnitude of the decline was sufficient to bring QQQ briefly back in touch with a couple of longer-term, "under the radar" daily moving averages that hadn't been tested in a while.

The first of these, QQQ's 126-day moving average, is equivalent to half a year's worth of trading days. This trendline provided key support during November and December 2016, and prior to that during a choppy stretch of trading in January 2015. And the second, QQQ's 160-day moving average, effectively contained a few deeper pullbacks from April 2014 through July 2015, as shown on the accompanying five-year chart.

It was during intraday action on Friday, Feb. 9 -- the day of the aforementioned QQQ trough -- that the tech-based exchange-traded fund (ETF) briefly broke through both of these moving averages before snapping back to end the session higher. But it was actually earlier that week that QQQ fell to within one standard deviation of each moving average -- on Feb. 6 for the 126-day, and Feb. 8 for the 160-day, according to Schaeffer's Senior Quantitative Analyst Rocky White. And on previous occasions where QQQ has pulled back to each of these moving averages after a lengthy stretch above it (defined as 80% of the time over at least two months, for our purposes), the fund's returns going forward have been a mixed bag.

In the past three years, there have been seven of these pullback signals involving the 126-day. The average one-week return following these occurrences is 0.77%, but the average one-month return is a 1.10% drop, with only 50% of returns positive over this time frame. The one-month return following the Feb. 6 signal is still an open question, but the one-week return was notably weaker than average -- a loss of 1.61%.

Only five 160-day pullbacks have transpired in the past three years, but a similar dichotomy appears in the returns following a signal. QQQ sports an average one-week return of 1.96% after such pullbacks -- and this time around, blew that stat out of the water by surging 7.98% in the week after the Feb. 8 signal. But one month after a 160-day pullback, QQQ averages a drop of 1.12%, with only half of the returns positive.

To put this in perspective, QQQ's average "anytime" returns over the past three years are 0.30% over one week (60.7% positive), and 1.28% over one month (70.9% positive). So while QQQ tends to outperform its typical returns in the immediate days following a pullback to one of these trendlines, it goes on to underperform by a considerable margin over the next month.

We've already noted that the one-week returns following this latest signal deviate considerably from their corresponding "averages," so the same could easily be true of QQQ's ultimate one-month returns. But an "average" return after these latest pullback signals would have QQQ trading back down around $160.52 by March 6, and $151.73 by March 8. In the event of such a drawdown playing out, bulls will very much want to see the $150 level hold up as support, as this round number was resistance in mid-October just prior to a bull gap, before switching roles to mark a floor earlier this month.

Finally, those wishing to hedge against a short-term sell-off in QQQ will want to take note of the current term structure, with at-the-money implied volatility levels hovering right around 16.5% from the weekly 3/2 series all the way out through the weekly 4/6 series.