Technology stocks (as represented by the S&P Dow Jones Technology Select Sector Index) are down over 24%1 year to date (as of June 10^th, 2022), officially falling into bear market territory2.

After posting significant returns in 2020 and 2021 during the global COVID-19 pandemic, the technology sector faces headwinds from a combination of surging inflation3 and a hawkish Federal Reserve. This, and the prospect of multiple future interest rate hikes4 sent the valuation-high technology sector into a rout, with many stocks experiencing deep drawdowns from their all-time highs.

The question is: What can investors expect from the technology sector moving forward? And how can they trade based on their predictions?

The Technology Landscape

Technology is the single largest segment of the U.S. stock market, dominating about 26% of the S&P 500.7 The sector deals with the manufacturing, distribution, and sales of various electronic products and services. Notable subsectors include:

Technology companies are often considered to be growth stocks with high price-to-earnings, price-to-sales, price-to-book and price-to-free-cash-flow multiples. The sector is characterized by high earnings and revenue growth, with substantial reinvestment in research and development. These high valuations are, in theory, based on investor and market expectations of the sector's above-average future growth rate.

Technology companies also continually develop and launch innovative products and services. Because of this, a key feature of the technology industry is its strong competitive nature, with old products often quickly falling into obsolescence.

Investors can easily observe this cycle with the spate of new iPhone releases by Apple every year, the increasing dominance of cloud computing, AI, the metaverse and the rapidly improving capabilities of hardware, as measured by processing speed and storage capabilities.

For that reason, investing in technology stocks is a volatile endeavor with relatively higher risk. While companies can soar within the blink of an eye, they can also be disrupted and fall by the wayside quickly. Investing in technology stocks often plays strongly on momentum, sometimes making good candidates for day or swing trading.

Catalysts To Keep An Eye On?

Investors looking to make their fortunes in technology must keep abreast of earnings reports.8 With much of the sector dominated by a select few mega-cap companies, trading around their earnings reports — whether bullish or bearish — can end up being highly profitable and rewarding if your prediction is right. This is heightened by the tendency for multiple high-profile technology companies to announce their earnings around the same time.

Finally, investors should consider emerging global macroeconomic trends — namely, rising inflation, interest rate changes and supply-chain constraints. Hardware manufacturers and end-users are likely to be affected by a shortage of semiconductors, which may cause component and labor costs to rise and shrink operating margins, ultimately impacting net profits.

The Fed’s attempt to quell high inflation by raising interest rates may also hurt future earnings and free-cash-flow growth estimates, which can impact a tech company's current valuation and share price. The next FOMC meeting is scheduled for June 14^th-15^th, with markets pricing in a 50 basis point increase.

How To Trade Short-Term Technology Sector Trends With Direxion’s Daily ETFs

Both ETFs seek daily investment results, before fees and expenses, of 300%, or 300% of the inverse (or opposite), of the performance of the Technology Select Sector Index. This means each trade you make has the potential to yield triple the daily returns of the underlying holdings — or triple the losses.

TECL is the ETF to go with if you are bullish on technology and think prices will go up. TECS is the ETF to go short with if you are bearish and think prices will drop. TECL and TECS are both highly liquid, making it hopefully easy for traders to size their positions and make easy entry and exit based on their predictions for the sector's movement.

Both ETFs place high weightings on their holdings of Apple (23.5%) and Microsoft (22.1%), with high allocations toward the software (32.93%), hardware (24.61%) and semiconductor (20.88%) subsectors. The weightings are accurate as of March 31^st, 2022, and holdings are subject to change. A good use of TECL or TECS might be to bet on the short-term price movements of these stocks and subsectors.

As with all leveraged ETFs, instruments like TECL and TECS can be a powerful way to magnify short-term exposure but only if you do your due diligence on their underlying holdings, have a strong investment thesis and outlook for the technology sector, a high risk tolerance and a timely plan for when to take profits or cut your losses.

This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investing advice.

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Leveraged and Inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.

An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.

Additional risks include, for the Direxion Daily Technology Bull 3X Shares, Daily Index Correlation Risk, and for the Direxion Daily Technology Bear 3X Shares, Daily Inverse Index Correlation Risk, and risks related to Shorting and Cash Transactions. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.

Distributor for Direxion Shares: Foreside Fund Services, LLC.

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