Overnight on Thursday, Goldman Sachs (NYSE: GS) equity trading desk was flooded with investor inquiries, all asking the same question: how far would the tech selloff go? Yet buyers willing to step in and catch the falling knife were nowhere to be found.
According to John Flood, head of Americas equity execution services at Goldman Sachs (NYSE: GS), Wednesday, the midterm election day, was one of the busiest trading days of the year for the firm's equity desk. By Thursday, the picture was completely reversed.
"Today it's the exact opposite," Flood wrote in a note to clients on Thursday. "Our phones are blowing up with people asking about levels. Unfortunately, we are not seeing much actual trading."
Long-Only Funds Frozen Again as Hedge Funds Flip to Selling
Flood noted that long-only institutions have once again fallen into a wait-and-see deep freeze. These investors had aggressively cut risk exposure ahead of the midterm elections but were caught off guard by Wednesday's rebound and drawn back into the market. Now hedge funds are selling the artificial intelligence hyperscaler stocks they had just bought the previous trading day.
What worries the market even more is the absence of buyers. According to feedback from Goldman Sachs (NYSE: GS) clients, brokerage firms with large retail exposure reported that retail investors showed significant net selling imbalance for a second consecutive day.
Selling pressure is transmitting from top to bottom, with investors using broad-based instruments to reduce overall exposure. Data provided by Flood showed that the SPDR S&P 500 ETF traded at 160% of its 20-day average volume, the Invesco QQQ, which tracks the Nasdaq 100, saw volume reach twice its average, the VanEck Semiconductor ETF was 150% above average, and DRAM memory chip stocks saw volume expand by 75%.
"This feels a bit overdone," Flood wrote. "It's always darkest before the dawn."
Trigger: Election Politics Collide with the AI Trade
The direct trigger for this round of tech selling was the Democratic Party's sweeping victory in the midterm elections and its potential impact on the AI trade that has powered the market higher for the past three years. Voters strongly opposed building data centers in their own communities, and Democrats, now in control of both chambers of Congress, are expected to hold hearings and launch scrutiny into the development of artificial intelligence.
What began as a rotation out of semiconductors quickly escalated into a broad selloff, with all 11 sectors of the S&P 500 closing lower, led by information technology, which plunged as much as 7% intraday. The tech-heavy Nasdaq 100 fell 5.9%, wiping out more than $2 trillion in market value. The Philadelphia Semiconductor Index, or SOX, dropped more than 10%, heading toward its worst trading day since March 2020 during the COVID-19 pandemic.
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