Investors Hedge Against Tech Stock Slowdown Amid Fed Rate Cut Hopes

Investors are beginning to express concerns over the rapid and significant rise in technology stocks, prompting some to take measures to prepare for a potential slowdown in the upward trend. The Nasdaq 100 Index has been on a five-month winning streak, with only one trading day of decline in September, driven by optimism surrounding the prospects of artificial intelligence (AI) and expectations of a rate cut by the Federal Reserve. This optimism has led to a sustained rally in technology stocks, with the index's volatility indicator remaining stable for several months. On Wednesday, Oracle Corporation, a leading infrastructure software company, saw its stock price surge by 36%, marking the largest single-day gain since 1992.

In response to these developments, some investors have started to purchase put options to protect their gains from the year. The Invesco QQQ Trust ETF, which tracks the Nasdaq 100 Index and is the largest exchange-traded fund (ETF) by size, has seen the cost of hedging against a 10% decline in the next month rise to its highest level since 2022 compared to the cost of hedging an equivalent rise. This trend reflects a growing concern among investors about the sustainability of the current rally.

Investors are also bracing for several key events in the coming month, including the Federal Reserve's rate decision on September 17 and the release of the Consumer Price Index (CPI) report later this week. The probability of the Invesco QQQ Trust ETF's put-to-call skew remaining at high levels is only 8%, according to data, highlighting the delicate balance of market sentiment.

Investors are increasingly concerned about the potential for a market downturn, as indicated by the high levels of put-to-call skew. This metric measures the relative cost of put options compared to call options, and its elevation suggests that investors are more focused on protecting against downside risks. The demand for call options has been relatively low, further contributing to the increase in the put-to-call skew.

Investors are likely purchasing hedging tools to safeguard their equity portfolios against potential market declines. However, it is important to note that the put-to-call skew measures the relative cost of put and call options, not the actual price investors pay to hedge against downside risks. Currently, this actual price remains lower than the peak levels seen during the trade war uncertainty in April 2025.

Despite the absence of alarm signals from major volatility indicators, such as the VIX index hovering below 16, there is a palpable sense of tension in the market beyond the large-cap technology stocks. For instance, on Tuesday, a trader spent approximately 9.3 million dollars to purchase put options on the SPDR S&P 500 ETF Trust, which would yield profits if the S&P 500 Index declines by 3.6% before September 19. On Monday, another investor allocated 13.4 million dollars to acquire a long-term hedging tool to mitigate the risk of a 58% plunge in the S&P 500 Index by December 2026.

Historical data from Bank of America Corp. indicates that September is the worst-performing month for the stock market since 1927, with a 56% probability of a decline. This historical pattern lends credibility to the recent hedging activities by investors. The current market conditions bear similarities to those in 2019, when the stock market experienced a strong first half but weakened in the latter half of the year following a rate cut by the Federal Reserve.

Investors are advised to adopt a hedging strategy, such as purchasing protection against a 5% decline in the S&P 500 Index while selling insurance against a deep market downturn, which is considered less likely to occur. The focus is on mitigating the risk of minor declines rather than extreme market events.