A hedge if this tech comeback is a head fake and a correction is still in order

Whether something looks like a good investment is a relative thing. The Technology Select Sector Index, which the ETF ‘XLK ‘ tracks, is down about 9% since the all-time high on July 10. The total return year-to-date is 13%, trailing the total return for the market by nearly 4%. This is even though the technology sector earnings have experienced a compound annual growth rate 2.7% greater than the S & P 500. The chart below reflects the earnings growth of the Technology Sector vs. the S & P 500 over the past 20 years in a log scale. Not only has the technology sector grown earnings faster, but earnings growth has also been more stable. This may challenge the notion that many technology stocks are more speculative than the more diversified large-cap broad market index. If I asked whether you would prefer to own a steadier, faster-growing pool of innovative businesses rather than a slower-growing, more volatile pool of companies, including a decent number of which may be struggling to keep up with a rapidly changing economy, the choice would be clear. Of course, before you write the check, you probably have a question or two, such as “What’s the catch?” and “OK, how much?” …and there’s the rub. While technology stocks are down almost 9% from their all-time highs, those all-time highs also reflected all-time high valuations. There’s another problem — namely, the price action. Reviewing 22 of the leading technical indicators on XLK, 15 are negative. The trade It’s worth noting, too, that despite this week’s rally, volatility remains high. Volatility measures market skittishness, the intersection of fear and greed. Thirty-day realized volatility for the technology select sector index is in the 85th percentile. XLK YTD mountain Technology Select Sector SPDR (XLK), YTD This rebound may have legs, and we’ve rebounded back through the 150-day moving average, but it’s also possible that this is a head fake in the downturn from all-time highs and that a formal correction (down more than 10% from all-time highs) is possible. I suspect technology stocks are at risk of entering correction territory before the year’s end. Therefore, I would suggest a hedge at least, or for the more aggressive and speculative traders, perhaps even an outright bearish bet. Higher volatility means higher options prices, which a vertical spread can help mitigate. The trade : Sell XLK Oct. 25 $200 put Buy XLK Oct. 25 $215 put One could hedge beyond the election if one chose, but I guess we’ll know whether this is a bear market rally before then, so I’ve chosen late October in my example here. DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.