Technology stocks are poised to be the best performing sector this year after a brutal 2022, Fundstrat says

• Technology stocks are poised to be the best performing sector in 2023 after a brutal 2022, according to Fundstrat.
• That's because financial conditions are easing as the Fed slows down its interest rate hikes.
• Also helping the technology sector is an improving technical outlook after it reclaimed its 200-day moving average.

After a brutal 2022, investors should start warming back up to technology stocks, according to a Wednesday note from Fundstrat's Tom Lee.

Lee said he expects tech to be one of the best performing sectors this year, which would mark the polar opposite of their showing in 2022.

Lee's confidence stems from the fact that financial conditions are beginning to ease as the Federal Reserve slows down the pace of its interest rate hikes, and as inflation shows signs of easing. That's great news for tech stocks because the sector has historically moved higher when financial conditions are improving.

"Technology is arguably the greatest beneficiary of" easing of financial conditions and easing of cost pressures for producers, Lee said.

Also boosting the case for owning technology stocks is an increase in investor skepticism towards the sectors year-to-date rally, as short interest in the space continues to increase.

"This rally year-to-date has been met with investor skepticism and they are increasing their short selling of technology. To me, this is fuel for further upside," Lee said. According to data from FactSet, the median short interest as a percentage of float has increased to 4% over the past few weeks, even as short interest fell for the broader market.

Improving technicals are also increasing the chance that technology stocks will outperform in 2023, according to the note. Lee observed that the Nasdaq 100 has broke above its 200-day moving average, which is a key technical resistance level monitored by traders. Additionally, the Nasdaq has broken out of its relative downtrend compared to the S&P 500.

The Nasdaq 100 "closed above the 200-day [moving average] for the first time since April 2022. So the technical picture has flipped positive," Lee said.

The improving technical picture comes at a time when parts of the sector have been "absolutely obliterated," according to Lee, as about 20% of technology stocks are more than 75% off of their highs. That means the road to recovery is probably closer to its beginning than end.

Year-to-date, the Nasdaq 100 is up 15%, almost double the S&P 500's return of 8% over the same time period.