The market today reminded me of one my all-time favourite movie scenes from Braveheart, in which the English cavalry is bearing down on William Wallace (Mel Gibson) and his fellow Scots.
The Scot’s tense up, along with the film’s viewers as the horses draw nearer while William shouts, “HOLD… HOLD… HOLD.” Wallace didn’t want his men to raise their spears too soon.
Investors were in a similar position as William Wallace today, as they braced themselves for one of the most extreme tech driven market sell-off since Covid. The largest perhaps in absolute terms with almost $3 trillion in market capitalization lost in a single day!
It’s past midnight as write this post after reviewing the market carnage (and opportunities) and replying to WhatsApp messages from investment partners and friends:
“What is happening, the market was up yesterday!?”
“Are you buying, and if so, what?”
To the later question, yes I did nibble a little and I’ll share some companies I plan to add to my portfolio over the next week in another post.
To the first question, here’s what we observed during the day and what really drove the sell-off:
1. Hedge Fund Deleveraging: The flow was dominated by liquidations of long positions and short sales on the semiconductors at the first downward break. Hedge funds that quickly bought back exposure yesterday were now actively selling, particularly the hyper-scalers, as aggregate gross exposure for prime brokerage clients sits near the 97th percentile over a five-year horizon. Several hedge funds have “blown-up” and shutting down.
2. Leveraged ETF Rebalancing: Leveraged ETFs alone may have triggered tens of billions in additional equity selling according to Morgan Stanley, marking the second-largest selling event of its kind since Covid!
3. The Narrative Shift: The debate has shifted away from long-term AI demand to the immediate pace and cost of funding. Rising financing costs, growing political scrutiny around data centre’s, and post-election regulatory uncertainties are hitting chips, memory, energy, and infrastructure alike.
How we are positioning our portfolios?
When markets fall sharply, leveraged ETFs must mechanically reduce exposure regardless of company fundamentals, creating a feedback loop of forced and indiscriminate selling.
We remain highly selective focusing on robust business models and quality balance sheets. The indiscriminate selling across the board has created many compelling long-term investment opportunities, but timing the purchases requires strict risk discipline.
Which is your favourite stock? Are you buying now, or holding?
Disclaimer: This post is for informational and educational purposes only and does not constitute financial, investment, legal, or tax advice. Always conduct your own independent due diligence before making investment decisions.