Asian equities are technically approaching extreme oversold territory, while the rapid buildup of short positions in US stocks is shifting market risk from a "gap down" scenario to a "short squeeze" scenario. UBS recommends investors shift their strategic focus from defense to offense, buy on dips, and pay close attention to the structural opportunity in semiconductors relative to software.
According to a report from a trading desk, UBS strategist Zain Nizami noted in his latest report that over the past two to three days, both defensive positioning and aggressive short strategies have profited, but multiple price action and positioning indicators suggest these trades are now significantly stretched. The Hang Seng Tech Index is currently 23% below its 200-day moving average, with its RSI at 27; the CSI 300's RSI has also fallen to 23.9, hitting historical lows while testing support at its weekly 200-day moving average.
Nizami stated that given current sentiment, positioning conditions, and macro headwinds already priced into the market, "maintaining an outright bearish and defensive stance is becoming increasingly inappropriate," and the current risk-reward ratio is tilting toward buying on dips rather than chasing short strength. However, he also warned that macro risks and correlation risks have not fully dissipated, and the market has not yet seen a classic broad-based panic selloff, meaning it is not yet appropriate to shift fully into "risk-on" mode.
Asian Stocks Deeply Oversold, European Markets Locally Overheated
Thursday's Asia-Pacific trading session saw significant selling, and based on subsequent earnings and geopolitical information, the decline appears disproportionate to fundamentals. The Hang Seng Tech Index RSI fell to 27, at a 23% discount to its 200-day moving average, which UBS characterizes as "extremely oversold." The CSI 300 is under similar pressure, with an RSI reading of 23.9, matching historical lows and testing critical moving average support.
The Hong Kong market absorbed the vast majority of selling pressure, with the Hang Seng Index recording an "overwhelming down day" in which 95% of constituent stocks declined; South Korea's KOSPI also fell sharply, with 627 stocks declining versus only 152 advancing.
In contrast, certain European markets are showing signs of localized overheating. UBS data shows that approximately 40% of constituents in Switzerland's SMI Index and about 25% of constituents in Germany's DAX Index (mainly driven by insurance sector and SAP-related exposure) have RSI readings above 70, entering technically overbought territory.
Macro Headwinds and Correlation Risks Remain Concerns
Nizami pointed out that current market sentiment remains dominated by cross-asset dynamics. Elevated oil prices, widening French-German government bond spreads (OAT-Bund spread), and rising sovereign bond yields have collectively created a recent risk-averse atmosphere—though safe-haven inflows have since pulled yields back somewhat. Political and geopolitical headline volatility has further amplified these moves.
At the same time, multiple cross-asset correlations are rising again, and the relative value relationship between semiconductors and software has approached extreme levels. UBS believes the next potential risk point is not a continued sharp market decline, but rather the concentrated unwinding of positions from rising correlations and crowded sectors—reversals in price relationships and narrowing market breadth, against a backdrop of persistently increasing short interest, warrant high vigilance.
US Equity Short Positions Elevated, Squeeze Risk Cannot Be Ignored
Data from UBS's Systematic Advisory division (headed by Amandine-Parisa Kara) shows that the size of US equity short books has risen significantly, both in absolute terms and relative to historical levels for the same period. Nizami judges accordingly that most of the positioning adjustment pressure may have already been released, and the risk of an upward short squeeze is building, now greater than the risk of further gap-down declines.
From a fund flow perspective, US equity long positions continue to accelerate their reduction, accompanied by a slight increase in shorts (hedging in nature); Europe is seeing defensive net inflows. UBS high-touch flow data also shows that the previously overwhelming defensive fund flows have somewhat converged, with institutional activity becoming more scenario-based and stock-specific.
Semiconductors vs. Software: A Structural Opportunity Worth Watching
Within the technology sector, gross position compression in semiconductors and semiconductor equipment has accelerated markedly, and deleveraging signs are beginning to appear in the hyperscaler segment. Nizami believes there is currently an attractive trade idea: short hyperscalers, cover semiconductor longs, or construct a relative value strategy between the two using ratio hedges.
Overall, UBS's recommendation can be summarized as follows: conditions are not yet in place for a full-scale offensive, but the risk-reward ratio for buying on dips is improving, and the strategic focus should shift from "selling rallies" to "buying pullbacks," with the structural opportunity in semiconductors relative to software deserving priority allocation.
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