Critical Tech Sector Bounce Incoming?

Tech sector bounce is potentially on the horizon, despite a recent tech wreck that has rattled markets, leaving many investors wondering if this battered S&P 500 sector could be primed for a rebound.

Hard to believe, but amid the recent shellacking meted out to parts of the technology sector — on fears AI will eat software and jitters about gazillion-dollar capex pledges — the S&P 500 is only down 2.6% from its record high.

Perhaps it feels worse because the stock market dip has been accompanied by intense volatility in precious metals and a crypto collapse.

So what happens next? One development has seen the broader market underpinned by a rotation into the non-digital economy, with shares of Coca-Cola KO\ +1.50%, for example, this week surging to a fresh peak.

Indeed, Jonathan Krinsky, technical strategist at BTIG, notes that 19% of the S&P 500 SPX\ -1.23% hit a 52-week high midweek, the most in over a year. “Yes some were defensive (staples), but that’s not an overly bearish message,” he says in a bulletin published Thursday.

Still, it’s doubtful the S&P 500 SPX\ -1.23% can make much headway unless the hard-hit tech sector can find its footing once again. The fundamental concerns may linger, but where do we stand from a technical perspective?

For the S&P 500 itself, Michael Kramer at Mott Capital Management notes that the Wall Street benchmark sits around the 6,800 and “the next area of support would likely be between 6,700 and 6,720.”

The good news for bulls is that the iShares Expanded Tech-Software Sector exchange traded fund IGV\ -4.97%, down more than 13% in just the last five sessions and the flag-carrier of recent tech-doom, may be itching to tech sector bounce. Volume of shares traded averaged about 45 million over Wednesday and Thursday, a record high that suggests capitulation selling, according to Krinsky.

He adds that the IGV this week also tested the long-term uptrend from 2009 lows, as well as hitting its 200-week moving average. In addition the IGV’s 14-day relative strength index, a gauge of share price momentum, finished Thursday’s session at just 14.8. An RSI below 30 is deemed to signal an asset is oversold.

“We think a tactical counter-trend rally [for the IGV] should be starting soon,” says Krinsky.

His assessment dovetails with that of Chris Watling, chief market strategist at Longview Economics, who says that according to his overextended indicator, “the ‘software and services’ industry group is at one of its most oversold levels in the past decade.”

Watling adds that the put-to-call option ratio for the Nasdaq 100 NDX\ -1.38%, which contains a very large tech weighting, is at low levels and close to signaling a buy for the index. Put options are usually bought when traders are pessimistic about an asset price, while call options are bought when they are optimistic. Consequently a low put/call ration suggests pessimism is carrying the day.

In addition, Watling says, the NDX is oversold on Longview’s medium-term technical scoring system.

“So while this isn’t a call to BUY tech or software outright (for now), it’s worth watching these indicators closely given some of them are starting to generate some interesting (BUY) messages. At some point the sector will experience, at the minimum, a relief rally,” says Watling.

Mott Capital’s Kramer remains wary, however. He notes that though the Cboe VIX index VIX\ -8.13%, a gauge of expected S&P 500 volatility, has been rising along with VIX futures, it has yet to spike in a manner that speaks to stock market capitulation. Normally VIX futures VXJ26\ +4.64% VXK26\ +2.92% are more expensive than the VIX because they must reflect the increased chance of volatility occurring over a longer time frame. That rising VIX futures curve is known as contango.

At times of extreme stock market anxiety the VIX often jumps above VIX futures, pushing the VIX curve into a condition known as backwardation. That is not currently the case, says Kramer.

“At the moment, the VIX is not trading above the 3-month VIX index, meaning the market has not yet flipped into backwardation. That suggests implied volatility is rising across the curve, but we have not seen a true crescendo of fear,” Kramer says.

The markets are showing mixed signals, presenting both risks and opportunities. Monitoring the tech sector bounce is crucial for informed investment decisions. This potential tech sector bounce could signal a broader market recovery, but caution and strategic planning are advised.

Analyzing Potential Tech Sector Bounce

The possibility of a tech sector bounce is supported by oversold indicators and high trading volumes, suggesting a potential shift in market sentiment.

Key Market Indicators

U.S. stock-index futures ES00\ +0.64% YM00\ +0.52% NQ00\ +0.82% are higher as benchmark Treasury yields TMUBMUSD10Y\ 4.205% inch up. The dollar index DXY\ +0.02% is barely changed, while oil prices CL.1\ +0.13% rise and gold futures GC00\ +0.53% are trading around $4,890 an ounce.

Earnings and Economic Data

Amazon.com shares AMZN\ -4.42% are down sharply after the company forecast big spending for 2026 and its profit guidance underwhelmed.

Molina Healthcare stock MOH\ -0.67% is diving after the health insurer forecast a sharp drop in profit for the upcoming year.

Shares of Stellantis STLA\ -6.74%, the carmaker whose brands include Fiat and Jeep, are plunging after taking a $26 billion charge as it scaled back its push into electric vehicles.

Companies reporting earnings on Friday include Cboe Global Markets CBOE\ +1.50% and Under Armour UAA\ -4.99%.

U.S. economic data due Friday include the University of Michigan consumer sentiment survey for February, released at 10:00 a.m. Eastern

Fed officials making comments include Fed Vice Chair Philip Jefferson speaking at 12:00 p.m.

Investors should closely monitor these developments to gauge the potential for a tech sector bounce and make informed decisions. For related Finance news, stay tuned to The Financial Standard.

“The software and services industry group is at one of its most oversold levels in the past decade.”

Source: MarketWatch