A blue wave breaks the AI rally
The US midterm elections delivered a Democratic sweep, initially sparking a brief relief rally before reality set in for the tech sector. Fears of strict artificial intelligence regulation and data center restrictions triggered a brutal sell-off, sending the Volatility Index soaring in a dramatic fashion. The sudden shift in political power forced a complete reassessment of the market's most crowded trades.
The week ended with a deeply mixed tone, as the risk dial swung wildly from risk-on Wednesday to extreme fear by Thursday. Breadth was overwhelmingly negative, with 125 of the 194 tracked assets ending in the red, driven by heavy liquidations during the New York sessions. The sheer speed of the reversal left many traders trapped on the wrong side of the tape.
Tech wrecks and energy dumps
The prospect of a new regulatory regime crushed semiconductor and AI-linked stocks across the board. Micron Technology and Marvell Technology led the plunge, with Marvell taking an extra hit from its massive all-stock acquisition of Lumentum. The selling pressure pinned heavyweights like Nvidia and AMD at their daily lows during brutal New York sessions, dragging the broader indices down with them as investors rushed for the exits.
Not all tech suffered the same fate. AppLovin delivered a massive earnings beat, defying the broader market panic to surge higher on heavy volume. Meanwhile, crypto-miners like Riot Platforms caught a strong bid, decoupling from the broader tech weakness as traders rotated into niche momentum plays. This speculative fervor also spilled over into quantum and space stocks, which enjoyed their own isolated rallies while the rest of the market burned.
Energy commodities suffered a severe liquidation as political shifts raised hopes for a diplomatic resolution in the Middle East. Brent Crude and RBOB Gasoline cratered, suffering some of their worst weekly losses in months as traders priced in the potential return of Iranian barrels to the market. The selling was relentless, with New York traders aggressively dumping positions and abandoning the energy sector entirely.
As equity volatility exploded, traders sought safety in traditional currency havens. The US dollar strengthened significantly against commodity-linked peers, pushing the US Dollar / Indonesian Rupiah pair sharply lower. At the same time, the US Dollar / Israeli Shekel climbed to a new high for the window as geopolitical risk premiums were rapidly repriced across the forex board, leaving emerging market currencies highly vulnerable.
Volatility goes vertical
Thursday delivered a historic shock to the system as the Volatility Index exploded, surging 70% in a single session as the post-election tech panic peaked. This followed a brutal Monday for energy markets, where RBOB Gasoline and Brent Crude both collapsed by 12.4% and 10.9% on sudden peace hopes. While the energy sell-off stuck through the week, the broader market managed to find a fragile footing by Friday's close.
Fading the chips
The Alpha Brief caught the tech weakness early, calling a short on Intel during the Asia session that captured a 14.4% drop by Friday's close, falling from an entry of 65.76 to settle at 56.28. It also successfully faded Alphabet and AMD, while grabbing a quick long on Riot Platforms before its Thursday surge.
Trapped in tech
Going into the election, speculative futures positioning from a Tuesday snapshot showed traders heavily crowded into short positions on the Euro FX and Natural Gas, while holding extreme long exposure in the Nasdaq 100. This lopsided tech optimism provided the perfect fuel for Thursday's violent unwind, leaving the market highly vulnerable to further deleveraging as we head into next week.
Inflation tests the pivot
Next week brings a crucial slate of inflation data, starting with US Core CPI and CPI on Tuesday, followed by Core PPI and PPI on Friday. These prints will test whether the market's sudden pivot from artificial intelligence growth stories back to macro fundamentals has any real staying power.
Meanwhile, the UK releases its GDP figures on Thursday, offering a fresh look at European economic health. With volatility still elevated and tech valuations under intense scrutiny, any upside surprise in the US inflation numbers could easily reignite the extreme fear that dominated this week's trading sessions.
That's the week, dug out. The Dig is back next Sunday. Follow The Dig by RSS.
Analysis, not investment advice: nothing in The Dig is a recommendation or an offer to trade.