US Tech and Telecom Rotation: Why Momentum Chasers Are Facing a Pain Trade in February

When the music stops in tech, it rarely does so with a gentle fade. Instead, the lights flicker, the DJ skips a beat, and traders find themselves scrambling for the exits. That’s the mood gripping US tech and telecom stocks this February, as the momentum trade that powered portfolios through the AI euphoria of late 2025 is showing unmistakable signs of exhaustion. The S&P 500 and Dow Jones are eking out gains in premarket, but beneath the surface, the rotation out of high-flying tech and into anything with a whiff of value is accelerating.

The headlines are doing their best to keep up. Barron’s is warning that US stocks are being trounced by foreign rivals, while Seeking Alpha is sounding the alarm on a software sell-off that ‘may be overdone’ but exposes deeper concerns. Meanwhile, the volatility gap between tech and small caps is now so wide you could drive a Rivian through it. The XLK ETF, the bellwether for US tech, is frozen at $143.37, refusing to budge even as earnings season throws up the usual mix of beats and misses.

It’s not just a US story. Japanese equities are on a tear post-election, with the Nikkei 225 hitting fresh highs, and Asian chipmakers like SMIC are blowing past earnings expectations. But back in the States, the narrative is shifting from ‘AI will eat the world’ to ‘AI might eat our margins.’ Investors are digesting the implications of new AI coding tools from Anthropic and OpenAI, which are threatening to commoditize software faster than you can say ‘Copilot.’ The result? A sharp divergence in implied volatility, with tech and crypto under pressure while small caps and gold catch a bid.

The calm in XLK is almost unnerving. Four straight prints at $143.37 suggest either the algos have gone on strike or there’s a battle royale brewing just below the surface. The last time we saw this kind of stasis in a momentum sector, it was followed by a violent unwind as crowded trades hit the wall. The Strykr desk is watching the options market for signs of stress. Implied vols on the big tech names have started to tick up, even as realized volatility remains subdued. That’s usually the canary in the coal mine.

The bigger picture is a global rotation that’s leaving US tech looking tired. Foreign equities are outperforming, and even Warren Buffett is tilting his portfolio away from the US. The AI trade isn’t dead, but it’s morphing. Investors are asking tougher questions about profitability, competitive moats, and whether the next wave of innovation will actually show up in earnings. The days of buying anything with ‘cloud’ or ‘machine learning’ in the S-1 are over.

The S&P 500 is still within spitting distance of all-time highs, but the internals are weakening. Breadth is narrowing, with fewer stocks driving the index. The old market adage, when generals stop advancing, the soldiers get shot, feels apt. If tech rolls over, it’s hard to see what picks up the slack. Small caps are trying to stage a comeback, but they’re not exactly inspiring confidence. The risk is that the rotation turns into a rout, with momentum chasers forced to de-risk in a hurry.

Earnings season is always a minefield, but this one feels especially fraught. The market is rewarding beats less and punishing misses more. That’s classic late-cycle behavior. The Fed is out of the picture for now, with yields drifting lower as traders brace for retail sales data. But if inflation surprises to the upside, all bets are off. The options market is pricing in a pickup in volatility, and the Strykr Pulse is flashing caution.

Strykr Watch

The key level for XLK is $143.37, a break below opens the door to a quick move down to $140, where the 50-day moving average sits. Resistance is stacked at $146, with heavy call open interest. RSI is neutral at 52, but MACD is rolling over. The options skew is starting to favor puts, and open interest in downside strikes has jumped 18% week-over-week. Watch for a spike in realized vol, if the calm breaks, it could get ugly fast.

On the broader S&P, $4,950 is the line in the sand. A close below there would confirm the rotation is turning into a correction. Small caps (IWM) have support at $195, but that’s a thin reed if tech starts to unravel.

The risk here is not just price action but positioning. The market is still crowded long tech, with hedge fund net exposure near record highs. If the unwind accelerates, liquidity could evaporate in a heartbeat.

The opportunity? Fade the froth. Look for relative value trades, long small caps versus short tech, or long gold as a volatility hedge. The easy money in AI is gone, but the pain trade has just begun.

The bear case is straightforward. If earnings disappoint, or if the macro data comes in hot, the unwind could get disorderly. The Fed is not your friend here. The bull case? Tech finds its footing, and the rotation is just a healthy pause. But that feels like wishful thinking.

For traders, the playbook is clear. Tighten stops, lighten up on crowded longs, and be ready to move fast if the calm breaks. The next few weeks will separate the tourists from the pros.

Strykr Take

The rotation out of US tech is real, and the pain trade is just getting started. The days of easy gains in AI and software are over. Traders need to be nimble, fade the consensus, and watch for cracks in the momentum trade. The Strykr Pulse is flashing yellow, proceed with caution.