Financial markets opened the new year in a week where liquidity remains thin. Nevertheless, significant financial and economic data is due, so traders and investors should not be surprised by some bigger-than-usual market moves.
One of the dominant themes in 2022 was the extreme weakness seen in the US technology sector. The leading US tech sector index, NASDAQ 100, returned -33.47% in 2022 – a cold wake-up call to investors in the sector.
The index tracks the largest 100 non-financial stocks trading on the NASDAQ stock exchange; the lowest annual performance was in 2008. That year, the NASDAQ 100 index dropped by -41.89%.
Investors pulled record funds out of tech stocks in 2022
Many stock market investors use market dips to add to their portfolios. Or, to start building a position in a company that saw its stock price going below what the investor believes the intrinsic value lies.
But in 2023, investors in the tech sector will have a hard time investing for at least two reasons. First, the Fed is not done with raising the interest rates, which is historically negative for stocks.
Second, investors have pulled $18 billion from tech funds in 2022, the most on record since 1993, according to Morningstar data.
If we add that the best annual performance for the index was in 1999, when it delivered +101.95%, then the 2022 outflows are worrying because there is no precedent of such outflows; hence the past returns become irrelevant.
NASDAQ 100 sits at major horizontal support
Despite the big negative performance in 2022, the NASDAQ 100 index might not be done declining. The technical picture shows that the index has sat above major horizontal support since the summer of 2022 and cannot bounce from it.
In technical terms, the market forms a descending triangle. Once broken, the next leg lower should see the index dropping well below the 10,000 level.
To sum up, the tech sector was in trouble in 2022, and the technical picture suggests the weakness might continue in 2023. If investors’ funds keep flowing out of the tech sector, then the bleeding is not over.
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