Whether something looks like a good investment is relative. The Technology Select Sector Index tracked by the ETF XLK is down about 9% from its all-time high on July 10. Its year-to-date total return is 13%, nearly 4% below the overall market total return. This is despite the fact that the technology sector’s earnings have experienced a 2.7% higher compound annual growth rate than the S&P 500. The chart below shows the earnings growth of the technology sector and the S&P 500 over the past 20 years on a logarithmic scale. Not only has the technology sector’s earnings growth been faster, but its earnings growth has also been more stable. This may call into question the idea that many technology stocks are more speculative than the more diversified large-cap broad market index. If I were to ask you would you rather own a pool of more stable, faster-growing innovative companies, or a pool of slower-growing, more volatile companies, the choice would be obvious. Of course, before you write a check, you’ll probably have a question or two: “What’s the catch?” or “How much?” …And therein lies the problem. Technology stocks are down almost 9% from their all-time highs, but those all-time highs also reflect all-time high valuations. And therein lies the other problem: price volatility. Looking at the 22 key technical indicators for XLK, 15 are negative. It is also notable that volatility remains high despite this week’s rally. Volatility measures market nervousness, the intersection of fear and greed. The Technology Select Sector Index’s 30-day realized volatility is in the 85th percentile. XLK YTD Mountain Technology Select Sector SPDR (XLK), YTD This rally could be sustained, and it has bounced back above its 150-day moving average, but it could also be that this is fake news in the downtrend from all-time highs and we could see a formal correction (a 10%+ drop from all-time highs). I think technology stocks are at risk of entering correction territory by the end of the year. So I would recommend at least hedging. For more aggressive and speculative traders, I would even recommend a full-on bearish bet. Higher volatility means option prices will rise, but the vertical spread helps mitigate that. Trade: Sell XLK Oct 25th $200 put option and buy XLK Oct 25th $215 put option. You can also hedge after the election, but I think we’ll know if the bear market rebounds by then, so I’ll use late October as an example here. Disclosures: (None) All opinions expressed by CNBC Pro contributors are the contributors’ own opinions and do not necessarily reflect the opinions of CNBC, NBC UNIVERSAL, their parent or affiliated companies, and may have been previously disseminated by the contributor on television, radio, the Internet or other media. The above content is subject to our Terms of Use and Privacy Policy. This content is for informational purposes only and does not constitute financial, investment, tax or legal advice or a recommendation to purchase any securities or other financial assets. The content is general in nature and does not reflect any individual’s unique circumstances. The above content may not be suitable for your particular situation. You should strongly consider seeking advice from your own financial or investment advisor before making any financial decisions. Click here for full disclaimer.
If this tech rally is fake news and a correction is still needed, this is a hedge
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