On Monday, semiconductor stocks are experiencing a rebound, but it’s worth noting that this surge doesn’t necessarily mean that tech investors can breathe easy.
The PHLX Semiconductor Index (SOX) recently faced its fifth largest drop in history. It’s important to not brush off such a significant decline, especially when a sector that essentially supports the entire technology narrative is facing such turmoil. To really grasp the weight of Friday’s movement, we should look at a few similar historical instances.
- Tech Wreck (March 2000): This period marks the start of the dot-com bear market, during which SOX also suffered additional severe drops of 10% or more in October 2000 and in July 2002.
- Pandemic Crash (March 2020): The index plummeted nearly 11% on March 12 and saw a staggering 16% decline on March 16 as global liquidity dried up.
Now, last Friday’s decline can be included in that list.
The current market dynamics are defined by their speed. It’s uncertain whether this dramatic decline signifies the onset of a structural cyclical correction akin to what we saw in 2000—or if it’s just a temporary liquidity flush. Either way, the path moving forward won’t be straightforward. I remember how, during the tech bubble, volatility surged even while stock prices climbed to new heights.
Pullbacks are typically healthy, but this level of price activity feels more concerning. It brings to mind the old saying: “Buy insurance when you can, not when you need it.”
Strategy: Prepare for the Next Move
Now, I’m not one to immediately advocate for selling off stocks—there are often tax penalties to consider. Still, you have to weigh that against the necessity of safeguarding against any imminent downturn. To set a definitive risk threshold without offloading stocks, I suggest utilizing a liquidity index option. Whether we’re experiencing a temporary blip or a structural recovery, having that safety net lets us rest easier.
In terms of tactical advice, consider buying the July QQQ 680 put, which is currently priced around $16, equating to just under 2.3% of QQQ’s closing price on Friday.
This hedge can serve two main purposes:
- If the semiconductor slump expands into larger-cap growth sectors, it offers immediate protection from deeper technology losses.
- For those planning to capitalize on an oversold market rebound, this hedge delivers both psychological and financial support, enabling them to bolster their tech stock holdings if a more pronounced pullback occurs.
While volatility presents risks, it can be managed strategically. It’s wise to secure your downside now and ensure your portfolio maintains flexibility, no matter what comes next.
