How to trade the tech sell-off

Published Fri, Feb 5 20166:17 PM EST

Disappointing guidance from a high-flying social network and a data analytics software company sparked a plunge in growth stocks as investors moved to avoid risk. So, what is the smart money thinking, and what should traders do now? The tech and biotech sectors underperformed, with the Nasdaq composite falling 3.3 percent and the iShares Nasdaq Biotechnology ETF declining 3.2 percent Friday. However, it was worse for many specific Internet, cloud and semiconductor names, which were down multiples of the indexes. CNBC Pro asked market experts, including a noted short seller from Citron Research, how investors should react to these difficult markets. They had plenty of advice. LinkedIn traded down 44 percent, and Tableau Software fell 49 percent Friday as investors worried about slowing growth trends at the companies. Although the declines were dramatic, it made sense to some. "Fundamentally, the value of any financial instrument is derived from the discounted cash flows that it will bring in the future. High-multiple stocks have significant growth expectations built into them; people are willing to pay up for the promise," said Nick Mazing of Ampera Capital. "When the cycle turns, you see these prospects re-evaluated, and you see high multiple stocks declining a lot more than the overall market." However, one trader used the plunge to step in and buy. "Only buy stocks that you are willing to buy lower. That is the lesson. I am happy (with the drop)," said Andrew Left, the founder of Citron Research. "There are great companies that I couldn't own for years because of their price, and now I finally have a chance to be an investor. LinkedIn is one of them." CNBC Pro received confirmation from Left that he started a long position in LinkedIn on Friday. Read More Super Bowl of stocks: Cam vs. Peyton trades Other investors believe this is a sea change in market sentiment and that darker days lie ahead. "We have shifted from a long period of rampant risk taking to one of growing risk aversion. While these (momentum) stocks benefit most during periods of rising risk appetites, they also suffer most when these attitudes reverse course, and I believe we are only in the early innings of a new 'risk-off' phase in the markets," said Jesse Felder of the Felder Report. Some strategists think it may be time to more cognizant of the downside risk of high-valuation companies. "The higher the valuation, regardless of earnings, the more likely sellers will engage. We are in the throes of a risk-reward reordering," said Peter Kenny, an independent market strategist. Here is a list of high valuation price-to-sales technology stocks in the Russell 1000 that investors may want to avoid in this riskier market environment. Read More Uncut: Full interview with hedgie Kyle Bass — CNBC's Giovanny Moreano contributed to this story.

LinkedIn headquarters in Mountain View, Calif.

David Paul Morris | Bloomberg | Getty Images

The tech and biotech sectors underperformed, with the Nasdaq composite falling 3.3 percent and the iShares Nasdaq Biotechnology ETF declining 3.2 percent Friday. However, it was worse for many specific Internet, cloud and semiconductor names, which were down multiples of the indexes.

CNBC Pro asked market experts, including a noted short seller from Citron Research, how investors should react to these difficult markets. They had plenty of advice.