2/26/26: Where the Tech Unwind Will Drive and Drown Stocks
From the TightSpreads Substack.
February 26, 2026
Despite NVIDIA posting what many would describe as the cleanest beat and raise of the entire AI supercycle, the stock dropped -5.5% — its worst day of 2026. This weighed on the NDX (-1.1%) and SPX (-0.5%), as investors looked past the headline numbers and focused instead on bigger-picture questions: the durability of hyperscaler AI spend, pressure on their capex/FCF profiles, and whether overall ROIC in the AI buildout will justify the massive capital outlays.
The market’s reaction was not a broad rejection of tech or risk. It was a textbook high-quality rotation day — concentrated weakness in the most crowded AI leaders, offset by strong breadth, positive equal-weight and small-cap performance, a sharp rebound in software relative to semis, and clear buying in cyclicals and consumer names.
SPX -0.5%, NDX -1.1%, but RSP (equal-weight S&P) +0.6% and IWM +0.5%.
75% of stocks outperformed the S&P 500 (only ¼ underperformed) — 99th percentile breadth reading.
8 out of 11 sectors closed higher, led by Financials +1.2%, Consumer Discretionary +1.2%, Industrials +1.2%.
Early Cycle Cyclicals (MSXXECYC) +1.1%, Consumer Finance (MSXXCONF) +2%.
Software vs Semis pair (MSZZSFSE) +5.6% — biggest one-day rally since the DeepSeek shock.
AI Tech Beneficiaries (MSXXAIB) -3.5%, Tech Momentum (MSZZTMTM) -2.8%.
Volumes +7% above 20DMA.
NVDA’s strength confirmed the AI demand thesis at the leader level, but the street used the print to rotate away from the most crowded, highest-multiple parts of the AI stack (semis, Mag7) into higher-quality software, equal-weight, small-caps, cyclicals, and consumer. The extreme positive breadth on a down NVDA day is a sign that the rotation is gaining traction rather than stalling.
Flows and positioning read-through
Retail was aggressive net buyer: estimated $1.8bn by 11am (95th percentile for time of day, $905mm above average), with strength in both single names and ETFs.
QDS highlighted the selloff was relatively concentrated and coincided with de-grossing, particularly weakness in L/S Momentum.
Baskets desk noted short covers in the HALO trade and active selling in semis.
Software flows remained muted overall but showed better bid in names like CRWD, GWRE, and HUBS; consumer flows also improved.
After weeks of extreme hedge-fund buying in semis and AI beneficiaries (many at 100th percentile exposure) and indiscriminate selling in software, today’s action suggests positioning exhaustion is setting in. Retail stepping in aggressively while institutions de-gross momentum creates the classic setup for a tactical squeeze or at least a pause in the recent AI-semi pressure. The HALO short covers aligns with the defensive/rotation theme. Both of which I have been writing about.
Earnings dispersion supporting the rotation
Consumer resilience was visible: CELH +7% (strong topline), SHAK +7% (Jan comps ahead), PENN +17% (relief after inline), URBN +5% (1Q/FY guide better than feared). Financials got a lift from continued consumer finance strength after BFH’s buyback (+8%). The only pockets of weakness were in BDCs/Alts (FSK -15% on EPS miss + dividend cut).
Tomorrow’s focus: PPI at 8:30a — another inflation read that could either reinforce the rotation (cooler print = easier financial conditions) or test it (hotter print = renewed growth concerns).
Simple Takeaways -
Breadth at 99th percentile on an NVDA down day is highly constructive — it shows the market has underlying health and is willing to rotate aggressively when leadership pauses.
The Software vs Semis reversal gaining momentum is the clearest signal yet that the intra-tech bifurcation is not over — quality software is starting to catch a bid after months of indiscriminate selling. Hopefully some of you took advantage of this in my last article: “50+ Tactical Trade Ideas: Software Upside”
Retail demand at 95th percentile while institutions de-gross momentum suggests the selloff may have been more technical/positioning-driven than fundamental — an exhaustion setup.
HALO seeing short covers continues the hard-asset rotation theme; semis selling reinforces that the most crowded leg of the AI trade is finally seeing profit-taking / risk reduction. Short covering will push HALO names higher, these names are mapped out at the end of this article: “2/24 Market Pulse: Peak Fear? & The Real AI-Winner Trade”