Technology Stocks — What's Going On And Some Ways To Short-Term Trade Them In 2022

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.

On the flip side, leading mega-cap stocks like Alphabet Inc. GOOGL, Apple Inc. AAPL and Microsoft Corp. MSFT continue to smash analyst estimates for earnings, leading the way with ample cash reserves, record-setting revenues and forward stock splits.5 Overall trading volume in technology remains high, with the presence of social media titans like Tesla Inc. TSLA CEO Elon Musk whipping retail investors into a frenzy over Twitter.6

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:

• Software, whether for consumer or enterprise use
• Semiconductors, such as transistors, central processing units (CPUs) and graphics processing units (GPUs)
• Hardware, including personal computers, smartphones, wearable technology, home appliances and televisions
• Networking and cloud-based services that provide hosting or platforms for other companies
• Artificial intelligence (AI) and machine learning
• Social media and digital advertising

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.

With the rise of social-media magnates like Musk, savvy traders can use their activity as a catalyst for trading strategies. For example, Musk's announcement on April 4 of a 9.2% stake in Twitter9 sent shares skyrocketing by over 27% intra-day and again by 11% pre-market later that week after proposing a $43 billion buyout.10 Because technology stocks tend to dominate market coverage and experience a high trading volume, investors may find it worthwhile to keep an eye on notable celebrities and CEOs in case they make a foray into the shares of other companies.

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

Despite the volatile market and environment of uncertainty and doubt, attentive traders still have a variety of instruments and strategies at their disposal to potentially turn a profit. Using leveraged exchange-traded funds (ETFs) like Direxion Daily Technology Bull (TECL) and Bear (TECS) 3X Shares is one way to trade a basket of technology stocks with added leverage.

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.

Sources:

1. https://www.google.com/finance/quote/IXT:INDEXSP?hl=enhttps://www.barrons.com/articles/things-to-know-today-51646736164
2. https://www.bls.gov/cpi/
3. https://www.reuters.com/business/finance/feds-bullard-wants-get-rates-up-35-by-year-end-2022-04-18/
4. https://www.cnbc.com/2022/02/01/google-parent-alphabet-announces-20-for-1-stock-split.html
5. https://www.benzinga.com/news/22/04/26653742/elon-musk-causes-searches-for-buy-twitter-stock-to-explode-by-1-147-following-the-recent-offer-to-bu
6. https://www.ssga.com/us/en/intermediary/etfs/funds/spdr-sp-500-etf-trust-spy
7. https://www.nasdaq.com/market-activity/earnings
8. https://www.bloomberg.com/news/articles/2022-04-04/musk-takes-9-2-stake-in-twitter-after-questioning-platform
9. https://www.bloomberg.com/news/articles/2022-04-04/musk-takes-9-2-stake-in-twitter-after-questioning-platform

Definitions:

• Dow Jones Technology Select Sector Index: Includes companies from the following industries: computers & peripherals; software; diversified telecommunication services; communications equipment; semiconductor & semiconductor equipment; internet software & services; IT services; wireless telecommunication services; electronic equipment & instruments; and office electronics.
• price-to-earnings: The ratio of a company's share price to the company's earnings per share.
• price-to-sales: Calculated by dividing the company's market capitalization by the revenue in the most recent year; or, equivalently, divide the per-share stock price by the per-share revenue.
• price-to-book: Ratio of the market value of a company's shares (share price) over its book value of equity.
• price-to-free-cash-flow multiples: Calculated as market capitalization value divided by total free cash flow amount.

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.

The "Technology Select Sector Index" is a product of S&P Dow Jones Indices LLC ("SPDJI"), and has been licensed for use by Rafferty Asset Management, LLC ("Rafferty"). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC ("S&P"); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC ("Dow Jones"); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Technology Select Sector Index.

Direxion Shares Risks – An investment in each Fund involves risk, including the possible loss of principal. Each Fund is non-diversified and includes risks associated with the Funds’ concentrating their investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Other Investment Companies (including ETFs) Risk, and risks specific to the Technology Sector. The value of stocks of information technology companies and companies that rely heavily on technology is particularly vulnerable to rapid changes in technology product cycles.

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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