Investing.com -- According to a note from BTIG on Monday, the tech sector's ongoing weakness is raising concerns as markets approach 2025, but they believe it suggests the rotation into other areas of the market could keep the broadening trade alive.
"Tech, which is by far the worst sector, [is] down over 1.5%," BTIG noted.
While tech has been a standout performer year-to-date, its momentum has faltered, placing it near the bottom over the last one and three months in both cap-weighted and equally-weighted terms.
"It has clearly lost momentum and relative strength in both cap-weighted and equally-weighted terms," added the firm.
Semiconductors remain the "weakest link" within tech. Although software stocks have provided some relief, BTIG warns that "software is now the most extended it's been above its 200 DMA in the last decade, excluding the post-covid rally."
While the relative strength in software is a positive development, the firm advises waiting for a pullback before adding exposure.
For bulls, BTIG emphasized that stabilization in semiconductors is critical to preventing a larger breakdown in tech next year.
The upside, however, lies in the rotation away from tech. "The IWM/XLK ratio [is] nearing a multi-year breakout," BTIG highlighted, which could bolster the broadening theme as money moves into other market segments rather than cash.
Notably, healthcare appears to be emerging as a potential winner in this rotation. "Healthcare (XLV) vs. Tech (XLK) is putting in a potential double bottom. We think this can work higher here," BTIG said.
While tech's relative breakdown poses a challenge, BTIG views the shifting dynamics as a potential catalyst for market breadth heading into 2025, provided the rotation persists across sectors rather than retreating entirely.