The recent sell-off in momentum stocks, which have seen strong price increases, is nearing its end, prompting analysts to suggest it may be time to reinvest in artificial intelligence (AI) and semiconductor stocks.
On July 20, Bloomberg reported that UBS's trading desk indicated in a recent client report that the momentum stock sell-off is likely to conclude by the end of this month, recommending a phased approach to buying AI and semiconductor stocks.
UBS cited the significant reduction of speculative positions as a reason for potential rebounds. According to UBS Prime Brokerage data, hedge funds have decreased their buying positions in momentum and semiconductor stocks by about 5% of total position value. This reduction is among the largest on record, with net positions in semiconductors and software stocks dropping to levels seen in April.
Michael Romano, head of hedge fund equity derivatives at UBS, noted that the fundamentals for the AI sector are improving, suggesting that recent price declines could present buying opportunities. However, he advised against increasing positions all at once, recommending a gradual approach instead.
Romano stated, "The reduction of risk in momentum stocks was a well-considered decision. Now, gradually increasing positions is a prudent approach."
UBS's momentum stock basket includes companies such as SanDisk, Broadcom, Oracle, KKR, Datadog, and Microsoft. A separately tracked software stock basket has risen about 20% since the end of June, showing sensitivity to changes in investor positions.
Romano analyzed that much of the recent buying in cyclical stocks, such as banks and industrials, has stemmed from short covering rather than new investments. He warned that if investors shift back to AI-related stocks, the cyclical stocks that have recently led the market may face corrections.
He anticipates that even if the momentum stock sell-off is not yet over, a bottom will likely be confirmed by the end of this month. UBS's momentum indicator fell 3.5% during trading on July 17 but rebounded by 2.5% within two hours. Romano projected, "If the trend shifts, liquidity could flood in, causing stock prices to rebound quickly."
Meanwhile, on July 21, Asian semiconductor stocks showed a broad rebound. The Bloomberg Asia Semiconductor Index rose over 3%, breaking a three-day losing streak. The stock markets in South Korea and Taiwan, which have a high concentration of technology stocks, also surged by about 4% as buying interest returned to AI-related stocks that had previously seen significant declines.
* This article has been translated by AI.
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