Investors' nerves are getting jangled over what has been the most popular tech trade in the stock market, and are showing increasing signs they're getting ready to bail.
Market pros responding to the July Bank of America Merrill Lynch Fund Managers Survey labeled the "FAANG + BAT" trade the most crowded for the sixth straight month. With a 53 percent response rate, the trade is the most crowded overall since the bet on the U.S. dollar going up in January 2017, according to the survey.
The acronyms refer to five big U.S. tech stocks — Facebook, Amazon, Apple, Netflix and Google-parent Alphabet — along with their Chinese counterparts Baidu, Alibaba and Tencent. The trade has been wildly successful this year, as FAANG stocks have gained an average 41.6 percent in 2018 alone, though the BATs are up a more modest 5.9 percent.
However, the FAANG trade is starting to show its first material signs of weakness.
Netflix stunned the market Monday when it posted earnings showing new subscribers dramatically below Wall Street estimates. Traders ran for the exits in off-hours trading, sending the company's shares down about 13 percent before the opening bell Tuesday.
"When your stock is priced for perfection and you don't deliver, the reaction can be pretty violent," said David Nelson, chief strategist at Belpointe.
The big question now for the market will be whether the Netflix earnings-related drop is a one-off event or symptomatic of something deeper.
Tech stocks have led the latest leg of the 9-year-old bull market, and even though respondents to the fund manager survey worried over the FAANG + BAT trade, they upped their allocation to tech stocks overall. Managers are now a net 33 percent overweight tech, making it the most favored sector. Investors also dumped bank stocks, something they may come to regret given the sector's relatively strong performance during earnings season.
"This is a big test for [FAANG]," Nelson said. "Equity ETF flows were positive in the last week but even more money went into fixed income telling me investors are looking for any excuse to pull the rip cord."
Elsewhere in the survey, fund managers increased their allocation to U.S. stocks to a net 9 percent overweight, the highest level since November 2016 and cut their allocation to European stocks to the lowest since December 2016, while a record net of 17 percent said they think safe haven gold is undervalued.
— CNBC's Tae Kim contributed to this report.