How Bullish Traders Are Seeking Yield In A Bearish Tech Sector

2022 was a banner year for short sellers in the tech sector. With most stocks in the IT sector having a down year, traders using a short-selling* strategy yielded aggregate profits of $300 billion. While most traders remain bearish on some tech stocks, others may rally in 2023. Tech bulls are often eyeing stocks like Microsoft Corporation MSFT and other software leaders. 

Defensive Stocks tend to Attract Bullish Traders

Usually the realm of long-term investing strategies, defensive tech stocks are also attracting short-term traders in 2023. Larger, more stable stocks whose prices tend to be less sensitive to economic downturns usually aren’t volatile enough to offer exciting short-term trade opportunities. 

But in a choppy bear market like the one traders have seen recently, the strong fundamentals of those defensive stocks can help create more dramatic rallies than they’ll find in harder-hit tech stocks. Microsoft is relatively one such defensive stock thanks to its asset-light business model and wide profit margins. 

Despite reports in January of widespread layoffs, the software giant has maintained stable revenue thanks to a strong cloud computing segment as well as its growing enterprise software segment.  

Meanwhile, according to their latest quarterly earnings report, Apple Inc. AAPL is continuing to build out its service segment which grew 14% year-over-year in 2022, bringing in $78 billion in revenue. With gross margins above 72% for the segment, that kind of growth has an outsized impact on the tech company’s bottom line. 

Both companies also command large market shares which have long made them among the favorites as defensive stock picks. That could also mean a potential opportunity for tradeable rallies in 2023, especially around the anticipated release of the iPhone 15 or the connected workplace platform, Microsoft Places. 

Macroeconomic Headwinds Likely to Make Bullish Tech Trades Tricky

No industry has been immune to the rampant inflation, supply chain disruptions, and overall economic uncertainty the world has faced over the past couple of years. But tech was especially hard hit by these macroeconomic trends. 

While some stocks might be able to rally in spite of these headwinds, the gravitational pull might prevent any true breakouts from happening. That means tech bulls will need to be especially nimble about entering and exiting trades to capture rallies that might be short-lived and sporadic. 

Direxion’s Software-Heavy Tech ETF 

Given that gravitational pull, traders might want to make the most of bullish trades by using a leveraged ETF like the Direxion Daily Technology Bull 3X Shares (TECL). The leveraged ETF seeks daily investment results, before fees and expenses, of 300% of the daily performance of the Technology Select Sector Index*. There is no guarantee the fund will meet its stated investment objective.

The index is weighted heavily towards software, with the top 10 holdings as of 12/31/22 as follows:

  • Microsoft MSFT: 22.04%
  • Apple AAPL: 22.02%
  • Nvidia NVDA: 4.48%
  • Visa Inc V: 4.19%
  • Mastercard MA:3.64%
  • Broadcom Ltd. AVGO: 2.79%
  • Cisco CSCO: 2.41%
  • Accenture - Class A ACN: 2.07%
  • Adobe ADBE: 1.93%
  • Texas Instruments TXN: 1.85%

Holdings subject to change and risk.

This makes it a potential tool for magnifying the returns on short-term trades. Of course, that leverage makes ETFs like this riskier as well, since losses are magnified just as much as profits. But traders who understand that risk and use an active short-term trading strategy may have the opportunity to turn sporadic tech rallies into potentially more profitable trades. 

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

Featured Photo by Christina @ wocintechchat.com on Unsplash

*Short selling (also known as “shorting,” “selling short” or “going short”) refers to the sale of a security or financial instrument that the seller has borrowed to make the short sale. The short seller believes that the borrowed security's price will decline, enabling it to be bought back at a lower price for a profit.

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

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.

The Technology Select Sector Index (IXTTR) is provided by S&P Dow Jones Indices and includes domestic companies from the technology sector which includes the following industries: computers and peripherals; software; diversified telecommunications services; communications equipment; semiconductors and semi-conductor equipment; internet software and services; IT services; electronic equipment, instruments and components; wireless telecommunication services; and office electronics. One cannot directly invest in an index.

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 the Fund involves risk, including the possible loss of principal. The Fund is non-diversified and includes risks associated with the Fund’s concentrating its 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 the Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Daily Index Correlation Risk, Other Investment Companies (including ETFs) Risk, Cash Transaction Risk, Tax 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. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund. 

Distributor: Foreside Fund Services, LLC.

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