It's time for investors to hedge their bets on tech stocks after a dramatic rally through the first half of the year, according to Goldman Sachs. Arun Prakash from Goldman's derivatives research team said in a note to clients on Tuesday that tech stocks look wobbly and could be due for a pullback. "Our analysis suggests that S & P Technology stocks have become unusually crowded relative to macro assets, and we see increased risk of downside asymmetry. We believe the recent rally in equities and low implied volatility offers a compelling case to own tail hedges," the note said. Goldman's suggested hedge is to buy 6-month puts on the Technology Select Sector SPDR Fund (XLK) that are 5% out of the money. Put options give the holder the right to sell an asset at a pre-determined strike price, and a put option is out of the money when the strike price is below the asset's current market price. With put options, investors' downside risk is limited to the premium paid for the contract. The XLK has surged 41.8% year to date but has shown signs of slowing recently. The ETF is up just 1.5% in July. XLK YTD mountain The XLK is up more than 40% in 2023. That slowdown should continue in the back half of the year, according to Goldman. "We believe the risk of mean reversion is the greatest over the next two quarters as the October quarter is typically the most volatile of the year for semiconductors and technology stocks," the note said. The XLK's top holdings are Apple , Microsoft and Nvidia . The fund does not hold some of the other Big Tech names, including Meta Platforms and Alphabet . — CNBC's Michael Bloom contributed reporting.
