Retail traders uneasy as 2023 stock rally relies heavily on tech giants

Amidst a robust stock market rally in 2023, retail traders are growing wary of its sustainability. Concerns linger about the reliance on a handful of tech giants driving major indexes, prompting some, like David Noonan in California, to shift to cash. With the S&P 500 and Nasdaq soaring, doubts emerge over potential economic headwinds, disappointing earnings from tech giants, and US-China chip restrictions. Individual investors are selling, and interest in tech ETFs is waning, reflecting a cautious sentiment among market participants as they assess risks and consider alternative investment strategies.

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Retail Traders Cash Out on Bet That Market Rally Is Nearing End

By Claire Ballentine and Charlie Wells

Retail traders are getting worried the party won’t last.

After a stock rally this year that has nearly erased the decline in 2022, some small-time investors are taking profits and selling riskier investments, as they ponder whether or not the handful of technology companies that have propelled major indexes can continue to prop up markets.

It’s a worry for both retail traders and Wall Street pros right now: Much like the broader economy, the stock market is doing pretty well, but many can’t shake the fear that looming headwinds will cause a turn for the worse. 

David Noonan, a full-time trader in Los Gatos, California, is one of those traders who’s concerned. This past year, the 45 year old has traded options around megacap tech names and popular indexes, including the S&P 500 and Nasdaq 100. 

Now, he’s mostly gone to cash, besides some short positions on Apple Inc. that expire at the end of the year. 

“I just look at where interest rates are and the crowding that we’ve seen within the magnificent seven, and I just have a feeling,” he said, referring to the shorthand name for Alphabet Inc., Inc., Apple Inc., Meta Platforms Inc., Microsoft Corp., Nvidia Corp. and Tesla Inc. “What can happen is if you see people start to sell and take profits that can have a waterfall effect. People start to lock in gains and that accelerates the selling.”

With the S&P 500 gaining almost 19% and the Nasdaq 100 up about 46% for the year, some market watchers are concerned the rally is over-inflated, and over-reliant on big tech. In the most recent earnings season, giants like Apple and Meta offered disappointing outlooks, fueling concerns about future growth potential. Plus, US restrictions on China’s access to advanced computer chips could also damage tech companies’ operations. Not to mention, there still could be an economic recession in 2024. 

Individual investors sold nearly $16 billion worth of stocks in October, more than they have in any month during the past two years, data from S&P Global Market Intelligence show. Interest in several exchange-traded funds that bet on the tech space has also dropped recently. ProShares UltraPro QQQ (TQQQ), which offers three times the daily performance of the tech-heavy Nasdaq 100, has seen nearly $1.5 billion worth of outflows this month, the most since January, according to data compiled by Bloomberg. 

Securing Gains

For Gerardo Giusti, the biggest tech companies are still good long-term bets. But the short term is a different story. 

The 50 year old, who lives in Cape Neddick, Maine, and trades full time, usually concentrates his option strategies around names like Tesla and Microsoft. But he closed the last of his tech trades the week of Thanksgiving, with the goal of securing gains. 

“I don’t see these names outperforming the market in the way they have,” he said. “They’re priced to perfection.”

He cited an economic slowdown and volatility around the 2024 presidential election as reasons that next year could be difficult for the stock market, especially in the first few months. He’s planning to invest more in hedges like gold or crypto, and potentially cyclical sectors — which include industrials, materials and energy — because they might be due for a catchup rally. His strategy will likely be buying calls  — or bets that a security’s price will increase — on industrial stocks and the iShares Russell 2000 ETF (IWM), which is focused on shares of small-cap companies. 

Of course, much of this depends on what the Federal Reserve does. At their most recent meeting, policymakers said they would “proceed carefully” on future interest-rate moves. Optimism that rate cuts will begin in 2024 has fueled a stock surge in recent weeks. If the Fed does begin cutting rates, Giusti said he might switch course and bet on a big tech rally. 

Meanwhile, Ashton Jones in Jacksonville, Florida, still thinks the market could advance into the end of the year, in what is frequently called a Santa Claus rally. But he expects a pullback in January. The 34 year old, who trades in his spare time and works as a financial analyst at an insurance company, typically trades options intraday and closes out his positions by 4pm. 

He plans to short the market starting in January and take risk off. 

“When the market runs up like this and defies gravity, there has to be a pullback as well,” Jones said. “Just based on the seasonality, there’s going to be profit-taking.” 

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