Bloodbath
Bloodbath
The market spent months pricing perfection.
Today, reality punched back. Semis were slaughtered, volatility exploded, Korea got smoked, and some of the most crowded trades in global markets suffered their worst day in months.
Reality check
Textbook reversal off the longer-term trend line. The 50DMA is still sitting much lower.
Source: LSEG Workspace
SOX slaughtered
SOX puked 10%, closing below the trend channel, as well as breaking below the 21 day MA. This is the most aggressive selling we've seen since the squeeze began, although the 50 day MA remains way lower.
Source: LSEG Workspace
Extreme
Going into the semis bloodbath we pointed out: Spot up, vol up in SMH has led to vols exploding to the upside, trading in the 100th %tile. Don't forget that there is an inverse logic to this should we turn lower, and things "collapse under the weight of its own delta" (McElligott nailed it again). More on the semis collapse here.
Source: Nomura
Protection
On Wednesday we argued that getting stopped out made less sense than owning defined downside exposure via put spreads.
The logic was simple. Protection looked expensive, but expensive protection often becomes much cheaper than unhedged downside once volatility starts repricing. That process is now underway.
If you implemented the QQQ July 730/690 put spread, consider rolling strikes accordingly in order to maximize optionality should the move continue.
Source: LSEG Workspace
Tail risk wakes up
You know things are getting "fluid" when implied correlations spike (although still overall low levels) and the TDEX (fat downside tails) surges like it does today.
Source: LSEG Workspace
Vol disconnect
Everybody loves EM these days, but few understand that EEM has become a massive Asia AI trade. We outlined those risks earlier this week (here).
What stands out today is the VXEEM versus VIX gap, which has blown out to extreme levels. EM vol is screaming stress.
Source: LSEG Workspace
Leveraged AI mania
Leveraged bets on South Korean stocks have exploded higher. This is already creating massive pain.
Source: Bloomberg/ZH
You are not early
The chase for Korea has been huge. More on crazy KOSPI here.
Source: GS
Leverage both ways
There were plenty of signs, but this Goldman chart probably says it best. As we highlighted last week, SK Hynix had become the world's largest leveraged single-stock ETF, despite being a name most investors barely knew a few months ago.
That is usually what crowded trades look like near the end of a move. Leverage amplifies returns on the way up, but it works the same way in reverse. Many late arrivals are no longer thinking about making money. They are thinking about getting back to breakeven, relying on hope as a strategy.
Source: GS
Then and now
SOX today versus NDX, although the SOX chart needs an urgent update. Maybe hold off on that buy order. More here.
For months, crowded positioning, leverage, and AI momentum worked together. Today they all started moving in reverse.
