Some Traders Were Prepared For Wednesday's Tech Slide

U.S. stocks tumbled Wednesday with the technology sector, the largest sector weight in the S&P 500, acting as the primary culprit. The tech-heavy Nasdaq-100 Index shed 4.40 percent while the Technology Select Sector Index dropped 4.85 percent.

Not all traders were frowning, however. Positioning in some leveraged inverse technology exchange traded funds (ETFs) indicates some traders were prepared for Wednesday's technology tumble.

What Happened

Among inverse leveraged technology ETFs, the Direxion Daily Technology Bear 3X Shares TECS is one of traders' favorites. TECS looks to deliver triple the daily inverse returns of the Technology Select Sector Index.

That index includes exposure to companies in the following industries: computers and peripherals; software; diversified telecommunications services; communications equipment; semiconductors and semi-conductor equipment; internet software and services; IT services; electronic equipment, instruments and components; wireless telecommunication services; and office electronics, according to Direxion.

TECS can serve as a short-term hedge on long positions in Apple Inc. AAPL and Microsoft Corporation MSFT because those two stocks combine for over a quarter of the underlying index's weight.

Why It's Important

Flows data indicate some traders were bracing for the retreat in technology stocks prior to Wednesday. For the 30 days ended Oct. 9, 2018, traders added an average of almost $128,600 a day to the bearish TECS, according to Direxion data.

TECS was not the only bearish technology ETF traders displayed enthusiasm for over that period. During that time frame, the Direxion Daily Semiconductor Bear 3X Shares SOXS averaged daily inflows of nearly $301,000.

SOXS attempts to deliver triple the daily inverse returns of the PHLX Semiconductor Sector Index.

What's Next

Earnings season will soon test the validity of the short technology thesis. From Oct. 22 through Nov. 2, about two-thirds of the Technology Select Sector Index delivers quarterly results. Over the same period, about 40 percent of the PHLX Semiconductor Sector Index reports earnings.

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