By Saqib Iqbal Ahmed
NEW YORK, Nov 11 (Reuters) – A US stock market shake-out has investors sifting through data to judge whether the selloff is over. Early indicators say it is too soon to sound the all-clear.
After the tech-focused Nasdaq-100 index hit a record high in early October, a plunge over the past few weeks has left tech and AI-related stocks about 10% below their recent peak — but showing recent signs of stabilization.
Four gauges offer a checklist as to whether the market is at another inflection point: tech positioning, stock correlation, options demand and technical charts. Two look encouraging, one offers a mixed picture, and the technical read says it is too soon to relax, analysts say.
“You can’t have a 5% down day and close on the lows and then think the lows are in,” said Mark Newton, head of technical strategy at Fundstrat Global Advisors.
“I think it’s going to be a great buying opportunity. But that’s not a reason to think that markets have officially bottomed,” he said.
The excesses these measures track are not new. Heavy investor crowding in the AI trade, persistent bullish options bets on individual stocks and stretched momentum measures have been market hallmarks for months.
Some of those measures began to pull back in early October, when the years-long rally in AI stocks stumbled on worries about AI infrastructure spending and the expected returns.
Then, investors dumped shares and bonds of CoreWeave, an Nvidia-backed AI infrastructure company, after third-quarter reports from hyperscalers, the cloud companies that build data centers, hinted at project delays and slower capital spending growth.
The latest catalyst was the US midterm elections. Democrats’ strong showing revived slowdown worries and hit AI stocks hard. Shares have steadied somewhat in recent sessions, partly reversing the post-election fall.
TECH OWNERSHIP
Before the latest drawdown, some investors had grown concerned about the market’s reliance on tech and AI names. Mega-cap growth and technology stocks have long led the bull market, and investors’ heavy exposure to them has been a theme for months. Current positioning could indicate conditions for a steadying, some say.
Since late September, investors have trimmed their exposure to these stocks while favoring other sectors, Deutsche Bank data show. Last week’s selloff pushed tech positioning below its April 2025 “Liberation Day” lows, according to Deutsche Bank.
“We see the latest selloff being driven by a forced positioning unwind,” Deutsche Bank strategist Parag Thatte said.
“Positioning is just below the bottom of its long-run band and Tech relative performance is also just below the bottom of its long-run trend channel, levels from which Tech has previously bounced up,” Thatte said, noting that the bank is overweight the sector.
Anthropic’s initial public offering in the coming days will test Wall Street’s confidence in the AI boom.
OUT OF SYNC
Also encouraging for bulls is the relatively benign jump in investors’ expectations for stock market correlation — stocks’ tendency to move in tandem rather than chart their own paths.
The AI boom changed how stocks trade relative to one another. In an October 27 note, Barclays strategists said three-month realized correlation among the S&P 500’s 50 largest stocks fell to a record low in late September.
They attributed that to powerful stock-specific themes, “most notably AI,” operating alongside macro drivers such as rates, inflation and oil.
A sharp selloff last week lifted expectations for how closely stocks will move together in the coming months, but only modestly.
“The lack of a larger jump in implied correlation shows that investors see this as more of a sector-specific selloff than a substantial economic downturn that would affect most or all sectors,” said Rocky Fishman, founder of Asym Research.
OPTIONS REVERSAL
Runaway demand for call options has been a key feature of this stock market rally. Calls give holders the right to buy shares at a fixed price, while puts offer the right to sell shares. The signals from this market are mixed.
Retail traders bought call options on individual stocks in record volumes this year, Carrick Lane data showed, helping prop up stocks as market makers — usually big banks and trading firms that take the other side of those trades — bought shares to hedge their exposure.
Last week that dynamic reversed, aggravating the selloff, according to John Marshall, a partner at Carrick Lane, which manages actively traded options strategies.
“Retail call buying in AI stocks fell sharply last week, and our data suggests that was the biggest change in positioning behind the election-week selloff,” Marshall said.
That shift left the one-month normalized put-call skew, a gauge of relative demand for puts, near the middle of its 13-year range, Marshall said. That paints a mixed picture.
“The good news: the AI trade no longer looks crowded in the short-term. The bad news: this signal isn’t washed out enough to buy equities on positioning alone,” Marshall said.
TECHNICALLY CAUTIOUS
While tech stocks’ rebound has helped them recover some of the losses from the post-election selloff, technical strategists are still cautious.
“We haven’t really seen evidence of the market being flushed out,” said Fundstrat’s Newton.
The rebound in Invesco QQQ ETF, which tracks the Nasdaq-100 Index, has stalled just below its downtrend from late October, Newton said.
Given bearish short-term trends and momentum, and the absence of DeMark exhaustion, a technical signal that a trend has run its course, US stocks are likely to stay volatile for a couple more weeks, Newton said.
“It’s still too early to have confidence that last week’s decline has run its course,” said Newton.
(Reporting by Saqib Iqbal Ahmed; editing by Megan Davies and Rod Nickel)
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