Tech stocks are scaring traders silly

Tech stocks have helped extend the bull market, but their recent price action is scaring the daylights out of investors.Reuters / Eloy Alonso

Tech companies have been the story of the stock market in 2017, surging to new highs and outperforming the broader market, all while helping lead major indices into rarefied air.

Now investors are starting to get spooked.

Which is not to say they’re turning their backs entirely. The tech-heavy Nasdaq 100 index is still within 3% of a record reached a month ago. Rather, what traders are doing is loading up on hedges — and they’re doing so in droves.

Investors are paying the highest premium since late 2008 to protect against losses in an exchange-traded fund tracking the Nasdaq 100, relative to hedges on an S&P 500 ETF, according to data compiled by Bloomberg.

In other words, they haven’t paid this much for downside protection on tech since the start of the bull market.

Traders are paying the most since late 2008 to protect against losses in tech stocks.Business Insider / Andy Kiersz, data from Bloomberg

Given what’s happened in recent weeks, it’s not particularly surprising that investors are starting to feel uncertainty around tech stocks.

On June 9, a Goldman Sachs report warned of complacency around Facebook, Apple, Amazon, Microsoft, and Google — mega-cap tech stocks that have been responsible for pushing the sector higher. The Nasdaq 100 sold off by more than 3% over the subsequent two sessions, its biggest two-day decline in almost a year.

Then, on June 29, tech companies in the S&P 500 dropped as much as 2.7% amid renewed selling in the so-called FANG stocks — Facebook, Amazon, Netflix and Google.

Even after those two weak patches, the Nasdaq 100 remains 18% higher for the year, more than double the return of the benchmark S&P 500.

Still, while the industry has shown remarkable resilience considering the magnitude of those selloffs, the seeds of caution appear to have been planted. Traders may remain bullish on tech, but they’ve made it clear they’re going to cover their tracks should matters go awry.