Editor's note: Any and all references to timeframes longer than one trading day are for purposes of market context only, and not recommendations of any holding timeframe. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don't have the resources, time or inclination to constantly monitor and manage your positions, leveraged ETFs are not for you.
A combination of surging inflation1 and the prospect of multiple future interest rate hikes2 sent the tech sector into a rout, with many stocks experiencing deep drawdowns from their 52-week highs.
Despite this, leading mega-cap stocks continued to smash analyst estimates for earnings, with some issuing forward stock splits. Overall trading volume in the sector remains high, with the presence of social media titans like Elon Musk whipping retail investors into a frenzy over his offer to purchaseTwitter3.
The bottom line is that for bulls and bears alike, ample opportunity for high returns awaits in technology stocks for those willing to stomach the volatility.
The Current Technology Sector Landscape
Technology is the largest segment of the U.S. stock market, dominating about 26% of the S&P 500. It includes manufacturing, distributions and sales of various electronic products and services, with subdivisions of software, hardware, semiconductors and networking.
A key feature of the technology sector is its strong competitive nature, with old products quickly falling into obsolescence. Traders can observe this cycle with the spate of new iPhone releases by Apple Inc. (NASDAQ: AAPL) or the streaming competition faced by Netflix Inc. (NASDAQ: NFLX). Hence, continued innovation is a key source of returns.
While companies can soar within the blink of an eye, they can also be disrupted and fall by the wayside just as quickly. For this reason, trading tech is a volatile endeavor with relatively higher risk, with momentum playing a key role for short-term traders.
Key Short-Term Catalysts to Keep an Eye On
Investors looking to make their fortune in technology sector should keep appraised of the following catalysts:
Earnings Reports: Trading around the earnings reports of the largest stocks can be highly profitable and rewarding if your prediction is right. Multiple technology sector companies are expected to release their Q2 2022 earnings throughout mid-July. Traders should be appraised of consensus analyst estimates for metrics and refer to the implied volatility in a stocks option's chain for expected moves.
Social Media Icons: Elon Musk's announcement on Monday, April 4 of a 9.2% stake in Twitter sent shares skyrocketing by over 27% intra-day, and again by 11% pre-market later that week after proposing a $43 billion buyout. Currently, Musk is embroiled in a feud with Twitter executives and the board over the true percentage of fake accounts on the platform, and is threatening to pull out of the acquisition as a result. Regardless of whether or not the deal goes through, Twitter stock remains unpredictable, and may spur higher volatility in the tech sector due to its high correlation and traders looking to risk-off at a moment's notice.
Macroeconomic Events: Rising inflation, interest rate changes and supply chain constraints may hurt the margins, profits and cash flow of technology companies, causing their valuations and share price to drop. Key dates to watch include June 30th for the next PCE release, June 10th for May's CPI report, and July 13th for June's CPI report. As well, traders should continue to monitor the congestion outside key Asian ports like Shanghai in light of the continuing "Zero-Covid" policies that have hamstringed supply lines. Unexpected further delays or relief could spark sharp movements for markets and high-beta sectors like technology.
How to Trade the Volatile Technology Sector
Despite the current volatile market and environment of fear, uncertainty and doubt, traders can still turn a profit. Using leveraged exchange-traded funds (ETFs) like may be an option for traders who are less risk averse.
Both Daily Leveraged 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.* Both funds have high allocations in the software (33.08%), hardware (24.63%) and semiconductor (20.59%) subsectors, allowing you to bet on their short-term price movements.
can be a powerful way to magnify short-term exposure, but only if you do your due diligence on the underlying holdings, have a strong investment thesis and outlook for technology stocks, a high risk tolerance and a plan for when to take profits or cut your losses.
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*Definitions
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.
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 www.direxion.com. A 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 value of stocks of information technology companies face intense competition, are particularly vulnerable, rapid changes in technology product cycles, product obsolescence, government regulation, and are heavily dependent on patent and intellectual property rights, the loss or impairment of which may adversely affect profitability. The prices of information technology companies and companies that rely heavily on technology, especially those of smaller, less-seasoned companies, tend to be more volatile and less liquid than the overall market. Information technology companies
Direxion Shares Risks – An investment in the ETFs involves risk, including the possible loss of principal. The ETFs are non-diversified and include risks associated with concentration that results from an ETF's investments in a particular industry or sector which can increase 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. The ETFs do not attempt to, and should not be expected to, provide returns which are a multiple of the return of their respective index for periods other than a single day. For other risks including leverage, correlation, daily compounding, market volatility and risks specific to an industry or sector, please read the prospectus.
Distributor: Foreside Fund Services, LLC.
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