Behind the sharp reversal of the U.S. stock market: Is deleveraging nearing its end, or is it the prelude to medium- to long-term risks?

*Author: Jae, PANews*

In just two trading days, U.S. stock players experienced a rapid roller coaster ride.

On November 5, U.S. stocks faced the strongest single-day sell-off in nearly 19 months, led by the AI industry chain. Rumors of "hedge funds collectively blowing up" quickly spread on social media, as if a financial storm was imminent.

Unexpectedly, the reversal came swiftly. On November 6, chip stocks sounded the horn for a counterattack: the Philadelphia Semiconductor Index rose by 4.2%, AMD surged by 11%, and AI concept stocks like NVIDIA also warmed up; the Nasdaq rose by 1.1%, and the S&P 500 slightly increased by 0.3%.

This unexpected market movement may have been foreshadowed a month earlier. Meanwhile, a migration of funds across major asset classes was quietly unfolding.

### Deleveraging Sell Pressure Slows, Medium to Long-Term Risks Unresolved

The rebound on November 6 actually showed signs in the last ten minutes of trading on Thursday.

Data from Vanda Research indicated that U.S. retail investors significantly shifted to buying near the close the previous day, with net purchases exceeding $100 million in the last 10 minutes.

**A more critical variable comes from leveraged ETFs.** According to Nomura Securities, to complete the net asset value rebalancing on November 5, leveraged ETFs needed to concentrate their sell-off of about $47 billion in stock exposure before the close. This was the second-largest single-day sell-off since statistics began in 2006.

When this large volume of passive selling was completed before the close, the short-term selling pressure in the market was significantly released. The forces of bottom-fishing funds, short covering, and institutional portfolio rebalancing combined to drive price recovery. JPMorgan noted in a post-market commentary that Thursday's intense deleveraging activity cleared some crowded trades, making the market's position structure healthier.

In other words, last night's rebound was more of a technical correction at the short-term trading level; the medium to long-term contradictions, such as policy expectations shifting and doubts about AI capital expenditure returns, have not truly dissipated.

### Narrative of Blowups Exaggerated, Hedge Funds Reduced Leverage a Month Early

In this round of U.S. stock turmoil, hedge funds became a focal point of market attention.

According to a Bloomberg report on November 5, Tiger Global's flagship hedge fund lost about 8.5% in October, with year-to-date returns roughly flat; Walleye Capital fell about 5.9% during the same period, with year-to-date losses reaching about 6.8%; Lone Pine Capital experienced a monthly loss of about 8.8%.


Social media was flooded with panic narratives of "Wall Street hedge funds collectively blowing up," with reports emerging from hedge funds like Walleye Capital, Engineers Gate, and Samlyn Capital about team layoffs, strategy streamlining, and returning capital to investors, intensifying market fears of a chain liquidation among institutions.

However, business contraction does not equate to blowups and liquidations; it is more about managers proactively managing risks and adjusting business models, rather than bankruptcy due to insolvency.

One timeline that is easily overlooked by the market is: **Hedge funds began reducing positions and leverage as early as October, and the crash on November 5 was more likely a concentrated realization of this process.**

Goldman Sachs Prime Brokerage data showed that in October, global fundamental long-short equity funds averaged a loss of about 3.5%, while systematic long-short strategy funds lost about 3.6%. This marked the first time since Goldman began tracking in 2016 that both strategies experienced losses exceeding 3% in the same month.

**More covert actions occurred in mid-October.** Within just two weeks, Goldman’s hedge fund clients net sold $20 billion in tech stocks; from October 8 to 14, they wiped out all net long positions in AI stocks accumulated since early 2025. By the end of October, the net leverage ratio of hedge funds dropped to 73.4%, a decrease of 4.2 percentage points in a single month, marking the largest monthly decline since March of this year.

Morgan Stanley's data also revealed this change. Stock-picking hedge funds experienced the largest active reduction in over a decade in October, with cumulative market exposure declining about 9% since June. By the end of October, over 40% of related funds had year-to-date returns that were flat or negative.

However, hedge fund performance also showed significant divergence, with not all sectors suffering losses.

Coatue Management recorded a positive return of 0.2% in October, Citadel rose by 1.7%, and Quantedge had a monthly gain of as much as 7.2%.

Some stumbled in crowded trades, while others profited from market volatility.

### Funds Have Not Disappeared, Just Moved

Behind the evaporation of trillions in U.S. stock market value is a massive migration of funds.

Money does not simply vanish; it flows out of high-volatility, high-leverage tech stocks and into safer, more liquid assets.

**The first major flow is into U.S. Treasuries.** On the day of the stock market crash, the yield on 10-year U.S. Treasuries briefly fell to 4.84%, hitting a new low since September. The inverse relationship between price and yield indicates that a large amount of capital is flowing into the bond market.

**The second stop is the U.S. dollar.** FxPro's chief market strategist Alex Kuptsikevich pointed out that the panic in tech stocks weighed on risk appetite, and the dollar regained substantial support from safe-haven buying.

ING's global markets head Chris Turner also believes that investors are currently more willing to temporarily hold cash in dollar assets, with the market leaning more towards converting to dollar cash rather than fleeing from it.

**Just as the dollar is in demand, the undervalued South Korean won and New Taiwan dollar have also regained attention.**

Yesterday, Claudio Piron, head of Asia foreign exchange and rates strategy at Bank of America Global Research, pointed out that buying opportunities for the New Taiwan dollar and South Korean won emerged after the sell-off in AI stocks. The substantial current account surpluses in Taiwan and South Korea will provide "strong support" for investors to establish long positions.

Another key judgment from Bank of America is that companies in the AI industry chain already have significant capital expenditures and export orders that will not be canceled due to the decline in U.S. stocks. Continued export settlement over the next 6 to 12 months will provide new underlying support for the New Taiwan dollar and South Korean won.

### Sell-Off Peak Pauses, Position Clearing May Not Be at an End

A rapid rebound after a sharp decline is not uncommon; the real challenge lies in distinguishing whether it marks the end of the decline or a temporary recovery.

History does not repeat details but often carries similar rhythms.

**August 2007: Quant Funds Deleveraging**

From August 6 to 9, several long-short equity quant funds experienced concentrated losses, leading to a bloodbath in the market.

Research by MIT scholars Amir Khandani and Andrew Lo found that the concentrated liquidation of crowded trades and the brief withdrawal of market-making capital jointly led to liquidity anomalies at that time.

The most intense phase of the sharp decline was concentrated over just four days, and after August 10, some strategies began to rebound, but the entire deleveraging process continued from July until the end of the year.

The sharp drop was merely the prologue; the true clearing of positions and recovery of risk appetite may need to extend over several months.

**March 2020: Pandemic Triggers Comprehensive Risk Asset Sell-Off**

From February 19 to March 23, the S&P 500 fell by about 34%, with the adjustment lasting over a month, interspersed with multiple sharp single-day rebounds, until it regained lost ground in August of that year.

In the short term, the movements of U.S. stocks over the past two days are more akin to the first scenario: the most intense concentrated sell-off may have passed, but the overall market's position rebalancing and recovery of risk appetite are far from over.

The market's divergence lies precisely here.

Noted investor Jason Calacanis stated that the market bottom may have already appeared, but tech stock valuations could still fall another 10%, at which point it would be an ideal buying opportunity.

Optimist Tom Lee, chairman of Bitmine, believes that the sharp decline in U.S. stocks on Thursday resembles the aftershock of a "blue tsunami" triggered by midterm election results, a combination of "last year's tariff shocks + DeepSeek moment + this year's June Situational Awareness forced liquidation," and such concentrated sell-offs often reach their lows within days, creating buying opportunities.

U.S. stock analyst Mark Minervini provided a more cautious assessment. He believes that while the decline in U.S. stocks may not reach the levels of the 1987 crash, it could lay the groundwork for some form of market collapse, which might last one to two weeks. If the downward trend intensifies, the worst-case scenario for SPY is a 10%-15% drop from its peak. The Nasdaq could fall by 20-25%, resembling a cyclical bear market like that of 1998.

For now, the rise in U.S. stocks last night was far from sufficient to offset the previous day's decline. An asset that drops by 20% needs to rise by 25% to return to its original point.

And the Nasdaq, which fell by 5.52% on Thursday, still has a significant gap from its previous position, even with a 1.1% rise the next day.

After two days of intense fluctuations, U.S. stocks stand at a crossroads. The entire narrative that drove the rise of AI tech stocks over the past few months is facing a harsh reality test. While short-term deleveraging may come to a pause, the medium-term battles behind issues like industrial policy implementation and AI investment returns have just begun to enter deeper waters.