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Risk of a volatile event taking down tech stocks is climbing

  • Implied volatility for large cap tech stocks has surged more than 15 percent over the last four weeks, according to ivolatility.com.
  • That's far more than the S&P 500's less than 5 percent gain in implied volatility over that time.
  • Tech has the greatest weight in the S&P 500.

A volatility measure for large U.S. tech stocks has jumped, signaling increased worries about a key part of the market, according to Nicholas Colas, chief investment strategist at Convergex.

The implied volatility of the Technology Select Sector SPDR ETF (XLK) has surged more than 15 percent over the last four weeks, according to ivolatility.com data, while that of the S&P 500 overall has climbed less than 5 percent. At one point this week, the so-called Tech VIX was 45 percent higher from a month ago.

"The general move [in implied tech volatility] is powerful enough to show we went from extreme complacency in tech to rational concern as tech continued to move higher," he said, also noting that "it's hard to see other groups step in and provide leadership if tech begins to roll over."

Tech is the top-weighted sector in the S&P 500 and has been the best performer year-to-date with gains of 12 percent. Now it appears traders are worried that fundamentals like big tech earnings won't support those gains. The tech-heavy Nasdaq Composite index posted a record high Thursday.

Already, IBM missed on sales expectations last week in its 20th-straight quarter of revenue decline and dragged down the Dow Jones industrial average. Apple, which is set to report earnings on May 2, has accounted for more than a fifth of the Dow's year-to-date gains, according to S&P Dow Jones Indices.

"Every big tech earnings report [is] potentially going to be a market-moving event because these are the crowded trades and crowded trades have a way of unwinding quickly," Colas said.

Next Thursday, three of the five largest S&P 500 names by market capitalization are scheduled to report earnings: Google parent Alphabet, Microsoft and Amazon.com.

Among the 11 sectors, tech is expected to report the second-best year-on-year growth in earnings per share for the first quarter at 16.4 percent, according to S&P Capital IQ consensus estimates.

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