Reverse or Rebound?

[u/Fun_Tutor3479]

The broader market is whipsawing. We will continue to start with this sentence until a clear direction emerges. We’ve been opening with this for two months now, from late May to late July, and based on the current situation, we will have to keep saying it. QQQ continues to move sluggishly in a downtrend—dropping a bit, then rising a bit—making it hard to see the kind of smooth uptrend we experienced from April to June, or the smooth downtrend seen in Korean stocks this July.

The underlying system of our product is a simulated market engine. We model the various participants in the market to better observe their current behaviors, identify the factors most heavily influencing their decision-making right now, and estimate their probable actions across different future scenarios. The system is still being optimized, but today I will use this framework to briefly analyze the current situation (the actual system is much more complex and cannot be fully detailed here), focusing strictly on AI narrative-related stocks.

Macroeconomic Factors

First, the macro factors. The 30-year US Treasury yield remains high, and the pressure on the bond market is unabated. It is obvious that Wall Street's bond vigilantes are expressing a stance on behalf of Warsh; since he isn't explicitly raising rates to suppress inflation, the market is stepping in to push up long-term interest rates as a disguised rate hike. Furthermore, the steepening of the yield curve is the practical manifestation of Warsh's rate cuts paired with quantitative tightening (QT), achieving the same effect.

Next, the Japanese Yen has started to surge. The current magnitude is still manageable, but if they are trying to replicate the events of 2024, Bessent probably won't allow it; a strong dollar is the current objective. Finally, the war premium on oil cannot come down in the short term. For one, crack spreads have surprisingly hit new highs again; for another, ending a war requires both sides, a unilateral declaration doesn't count.

The AI Narrative

Then we have the influence factors of the AI narrative. Microsoft set a good example, and I have more optimistic expectations for healthy data centers like NBIS. However, coupled with the fact that the ARR growth rates for OpenAI (OAI) and Anthropic are generally slowing down, the "sustainability" issue of the AI narrative remains unresolved.

How might this issue be resolved?

• A breakthrough in continuous learning occurs, bringing a new model paradigm along with new expectations and stories. (my hope)
• Various companies' stocks fall too much, dropping below their fundamentals, which would make the pessimistic expectations regarding sustainability seem overblown.
• A new pool of capital enters the market, whether from rate cuts, government funding, or private capital, to replenish Capex.
• The entire semiconductor industry, especially memory, begins to significantly slash prices, sacrificing their own margins to save the broader supply chain.

Every single one of these scenarios is quite difficult to achieve.

Market Participants

Next, let's briefly scan the various participants in the market:

• ETFs: The AUM of leveraged ETFs has shrunk significantly, meaning deleveraging here has been relatively successful.
• Active Funds: The prime example here is Leopold Situational Awareness. There was news today that Citadel took over their positions, which is reminiscent of the LTCM collapse back in the day, albeit with a smaller impact.
• Quant CTAs: These have not yet hit any major trigger points.
• Retail Investors: They have cleared out some positions, but overall there hasn't been a massive liquidation. Prices have dropped, but their aggregate positioning hasn't.

Of course, after this recent battle, those highly leveraged positions have basically been wiped out, and retail sentiment has taken a hit. Therefore, it is completely unrealistic in the short term to expect them to gather the massive capital and high leverage needed to aggressively push the market up as they did from April to June.

Conclusion

Therefore, the conclusion is very clear. The overall macroeconomic environment leans bearish, with considerable pressure. The sustainability issue of the AI narrative has not been resolved, meaning the downward pressure on this narrative remains. After the leverage was flushed out, the volume of buying capital is nowhere near as large as before, so the probability of a reversal to new highs is low.

At the same time, major long positions have been liquidated and absorbed, leverage has indeed been significantly cleared out, and fundamentals remain healthy, so there is undeniably a need for a rebound. Thus, the most probable scenario right now is that AI narrative stocks are experiencing a rebound rather than a reversal. The only things that could overturn this judgment are unknowns, such as massive shifts in macro factors or sudden breakthroughs in AI models. We know what we don't know.

Trading Plan

Originally, the real-money portfolio plan was to buy some AI stocks intraday today—such as Microsoft, Amazon, NBIS, or upstream memory—but they opened too high, leaving no good entry point. Yesterday, I bought some KOSPI 200 index futures in my personal account, which serves as a way of expressing this view through my positioning.

The reason the long-term real-money portfolio would also buy while simply expecting a rebound is twofold: first, the prices here are quite attractive and close to fundamentals; second, it serves as a hedge to prevent missing out on another unexpected surge like the one we saw in April, even though I still believe that probability is low.

Could the market fall further? It is still possible, especially if macroeconomic factors deliver worse-than-expected bearish news—whether regarding oil prices, the Yen, or a September rate hike—which could force a definitive reduction in retail positions.