Tech stock selloff: Record hedging costs show traders bracing for worst

Reuters / Andrew Burton

• Tech stocks sold off broadly on Monday, dragging major
  US indexes lower, especially the Nasdaq 100, which lost as much
  as 1.5%.
• Amid the selling, investors are paying the most ever
  for Nasdaq 100 downside protection on a one-month basis,
  relative to bets on further increases in the index.
• That could end up being a saving grace for tech should
  pressures continue to mount. By comparison, hedges were nowhere
  near as elevated during the dotcom bubble.

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Fresh off a rough week as the worst-performing group in the
S&P 500, tech stocks are
still feeling the pain.

The tech-heavy Nasdaq 100 index dropped as much as
1.5% on Monday, compared to a relatively tame 0.5% loss in the
benchmark S&P 500.

Much of the selling pressure stemmed from weakness in the
components of the so-called FAANG group — consisting of Facebook, Amazon, Apple, Netflix, and Google. Those companies hold large
weightings in major equity indexes, and exercise outsized
influence on the broader market.

The group has faltered since Facebook’s disastrous second-quarter earnings
report last week, which saw the social media titan forecast a
growth slowdown, stoking investor fears that a similar situation
could afflict other tech firms.

Also likely weighing on investor sentiment are reports that
Democratic senator Mark Warner is charging ahead with proposals
that would result in more tech regulation. Further, in a note to
clients on Monday morning, Morgan Stanley chief US equity
strategist Mike Wilson said the tech sector is showing signs of
“exhaustion.”

Based on one gauge of market anxiety, investors are historically
spooked. A measure called skew, or the premium options traders
are paying to protect against a loss in the PowerShares QQQ Trust
ETF over the next month, relative to wagers on an
increase, has spiked to its highest level on record. (Note: QQQ
is designed to track the Nasdaq 100.)

In other words, investors have never been more defensively
positioned for a possible tech meltdown.

Business
Insider / Joe Ciolli, data from Bloomberg

This nervousness may actually turn out to be a saving grace for
the market, however, since the surge in hedging costs shows
investors are braced for the worst. After all, one-month skew was
never this elevated — even at the height of the tech bubble, when
downside protection was needed most. Theoretically, this type of
preemptive behavior could help stem a possible selloff.

For further evidence of tech’s importance to overall market
strength, look no further than the impact it’s had on the S&P
500’s return this year. The index’s top 10 contributors have
accounted for 62% of the benchmark’s 7% year-to-date return,
according to Goldman Sachs data. Of those 10
companies, nine are in the tech sector.

Until tech’s iron-clad grasp on US stock indexes loosens, expect
deep swaths of selling — such as the one seen on Monday — to
continue roiling markets. But at the same time, find comfort in
the fact that so much hedging is going on, and perhaps consider
doing it yourself.

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