JPMorgan's latest research report indicates that the current downturn environment for AI infrastructure stocks is markedly worse than the correction seen last July, with retail investors so far showing a lack of "buy the dip" behavior, compounded by multiple unfavorable factors including a repurchase flow cliff, thin short positioning, and elevated leveraged ETF size, leaving the technical foundation for this rebound far more fragile than the previous episode.
According to a report titled "Flows and Liquidity" published by JPMorgan's global markets strategy team on October 14, the AI infrastructure sector, represented by Korean memory chip stocks, has come under renewed pressure recently, with the trigger once again being market concerns about competition — identical to last July.
However, the team led by JPMorgan strategist Nikolaos Panigirtzoglou, after comparing key indicators one by one including fund flows, short positioning, ETF structures, and corporate buybacks, concluded that the current market lacks multiple key catalysts that drove the rapid price recovery after last July's correction.
The report also notes that despite the recent pullback, cyclical stocks have not entered oversold territory from the perspective of positioning and fund flows, suggesting that downside risk remains considerable and that a full recovery in cyclicals would require a confluence of conditions including lower bond yields, strong earnings, and stabilization in the labor market.
Retail Investors Stay on the Sidelines, "Buy the Dip" Signals Absent
During last July's correction, retail investors aggressively bought Korean stocks through both leveraged and non-leveraged ETFs, with inflows reaching significant scale.
However, JPMorgan data shows that since October, both overseas investors' purchases through leveraged ETFs and domestic investors' allocations through non-leveraged ETFs have been extremely limited. The report explicitly states that there is currently virtually no sign of retail "buy the dip" behavior.
This divergence carries important implications for market direction. Last July, the active entry of retail funds provided crucial demand-side support for the market, while the absence of this force in the current correction has significantly diminished the momentum for natural price recovery.
Thin Short Positioning Makes Short Squeeze Rally Difficult to Replicate
Another important driver of last July's rally was large-scale short covering. At that time, the outstanding shares of EWY US Equity — the largest offshore ETF tracking Korean equities — surged approximately 30% in July alone, primarily to accommodate a sharp increase in short interest; subsequent short covering in August further propelled the stock price rebound.
However, JPMorgan data shows that since October, short interest in EWY has barely changed. Moreover, short positioning in US memory stocks (including Micron, Sandisk, Western Digital, and Seagate) as well as major semiconductor ETFs such as SMH and DRAM is also at low levels.
The report further notes that even short interest in the SPDR S&P 500 ETF Trust — SPY US Equity — is at historically low levels. The broad scarcity of short positioning means this downturn lacks the ammunition to form a rebound through a short squeeze.
Elevated Leveraged ETF Size and Buyback Support About to Fall Off
JPMorgan also identified two other structural factors exacerbating current fragility.
First, the ratio of leveraged equity ETF assets under management (AUM) relative to underlying stock market capitalization, after bottoming at the end of last July, continued to recover during August and September and currently sits at approximately the 70th percentile between this April's low and June's high. This means that compared to late last July, leveraged ETFs are now larger in size, and once market volatility emerges, the selling pressure from passive deleveraging will be more pronounced.
Second, buyback flows face the risk of falling off a cliff. Two major Korean memory companies announced a combined $40 billion share repurchase program on August 20, 2026, originally scheduled to run through November 2026, but due to accelerated completion, the buybacks actually concluded by mid-October. The disappearance of this support force did not exist during last July's correction, constituting a disadvantage unique to the current situation.
Cyclicals Not Yet Oversold, Recovery Conditions Still Premature
Beyond AI infrastructure stocks, JPMorgan also assessed the situation of cyclical stocks. The report notes that the sustained underperformance of the Russell 2000 Index and cyclical sectors including industrials, consumer discretionary, financials, and materials over the past one to two months has sparked discussion about recession risk pricing. JPMorgan estimates that the implied recession probability for the Russell 2000 and cyclicals relative to defensives has risen to approximately 30%, but recession risks implied by large-cap stocks, investment-grade and high-yield credit, interest rate markets, and base metals remain quite limited.
From positioning and fund flow indicators, although the relative positioning of cyclicals versus defensives has retreated since mid-August, it has not yet turned net short, indicating that cyclicals still have some distance from oversold territory. ETF flow data corroborates this judgment — since mid-2026, funds began flowing out of cyclical sectors on a relative basis, and this has accelerated recently, but has likewise not reached oversold levels.
JPMorgan believes that a full recovery in cyclicals and further broadening of equity market trading may require lower bond yields, strong corporate earnings, and the dissipation of recent labor market weakness, while also avoiding a resurgence in inflationary pressure that would trigger a more aggressive Fed rate hike cycle. The report concludes that despite the aforementioned near-term technical fragility, from a medium-to-long-term perspective, the fundamental backdrop for the tech/AI sector should still provide more constructive support.
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