The Deleveraging Week: why the stock market is down

Last week was a de-grossing of crowded AI positions rather than a broad equity liquidation. Hedge funds cut gross exposure at the fastest 20-day pace outside Covid, momentum crowding reset, systematic funds turned net short and dealers are short gamma. Oil fell as the Middle East risk premium unwound, although tanker traffic through Hormuz has not recovered. Tuesday's CPI decides whether the bond rally and a stabilization in equities can continue; the Street's year-end targets sit near 8,000, and midterm history favours the three months after an election.

The S&P 500 lost -2.68% in the week to November 6, its fourth weekly decline in a row and -5.6% since October 9. It closed -5.7% below the October 6 record. The Nasdaq-100 fell -4.91% and is -13.6% from its high, while the equal-weight S&P 500 (RSP) lost only -1.0%: the selling was concentrated in the largest AI-linked names. The VIX ended at 25.64, WTI crude fell -12.8% to $90.83 and the 10-year Treasury yield slipped to 4.86%.

Cap weight -2.7% vs equal weight -1.0%: a concentration unwind, not a broad selloff. Low volatility +7.2% and high beta -18.1% since the Oct 6 peak. Europe held up: DAX +0.01%, while Korea and Taiwan fell about a quarter from October.

Across assets, WTI crude (-12.8%) and the Nasdaq-100 (-4.9%) took the heaviest losses. Gold rose +4.7% and the dollar index +0.4%. Long Treasuries barely moved (+0.1%) even with equities under pressure, and high-yield credit (HYG) slipped only -0.3%: credit and rates did not confirm an economic scare, which points to a positioning event in equities.

Rebased to August 7, the Nasdaq-100 is now below where it started the period, after setting records on October 6. It is -13.6% from that peak, against -5.7% for the S&P 500. The Russell 2000 peaked in mid-August and has trended lower since, so the autumn weakness in small caps predates the AI unwind.

Energy (-12.0%) and semiconductors (-11.2%) fell hardest, followed by technology (-8.2%). Communication services rose +4.9%, and real estate, consumer discretionary, financials and staples also gained. Five of twelve sector funds finished higher in a week the S&P 500 lost 2.7%: a rotation inside the market, not a liquidation of all of it.

Wednesday's post-election rally lifted every gauge, then Thursday erased it. Over the week the equal-weight S&P 500 lost -1.0%, the cap-weighted index -2.7% and the Nasdaq-100 -4.9%. The 1.6-point gap between equal and cap weight is the signature of de-grossing in crowded mega-cap longs rather than a broad sell-everything move.

Factor returns tell the same story as sectors. Since the October 6 peak, the S&P 500 low-volatility ETF is up +7.2% while high beta is down 18.1%. J.P. Morgan reports its momentum factor fell 5.6% last week, its fifth straight weekly decline and 15.7% in total; October was the largest monthly unwind for long momentum, about 11%, roughly a six-standard-deviation move, taking momentum long/short about 40% off its peak. J.P. Morgan's strategists argue low vol is now less compelling after its move from the 0th to the 25th percentile.

Outside the US the damage was concentrated in the AI hardware supply chain: Korea -10.4% and Taiwan -11.7% on the week, about a quarter below their October 6 levels. China large caps rose +5.7% and India +6.6%. J.P. Morgan's flow data show hedge funds net buying EMEA and China/Hong Kong while selling North America and Japan; short covering in Europe reached a 3-sigma extreme last seen in late 2022.

European equities sat out most of the AI unwind. The DAX was flat on the week (+0.01%) and is +1.5% above its October 6 level after reaching 26,438 on November 4; the STOXX 600 rose 0.2% (WSJ). J.P. Morgan's flow data show hedge funds net buying EMEA while selling North America, with European short covering at a 3-sigma pace last seen in late 2022. J.P. Morgan notes EU median earnings growth of 13% now exceeds the US at 12% for the first time since late 2024, and recalls the first quarter of 2025, when the STOXX 600 beat the S&P 500 by more than 14 percentage points. In rates, German Bund shorts were covered, the OAT-Bund spread reached its widest in years and short-dated Italian BTPs saw the strongest buying in Europe. Monday morning, J.P. Morgan reported European indexes higher, led by Italy and Spain, with defense and 'ceasefire' baskets outperforming.

ES -2.8% and NQ -5.1%; Thursday traded 3.5M ES and 1.3M NQ contracts. Open interest rose into the drop (ES +3.4%, NQ +5.9%): new hedges and shorts. Gamma flip near ES 7,653; put wall near ES 7,025.

The front-month E-mini S&P 500 (ES) fell 2.8% on the week to 7,402.00, trading a 424-point range; the E-mini Nasdaq-100 (NQ) lost 5.1% to 27,085.25 over a 2,602-point range. Thursday was the heaviest session of the month: 3.54 million ES and 1.28 million NQ contracts. Open interest rose +3.4% in ES and +5.9% in NQ between October 30 and November 5 while prices fell, which points to new hedges and short positions rather than long liquidation alone. Every ES and NQ contract since 2007, with 1-minute bars, is in FinzData.

For futures traders, FinzData's dealer-gamma levels translate into ES and NQ terms using Friday's basis. The SPX gamma flip at 7,627 is about 7,653 in ES; the 7,000 put wall is about 7,025 and the 8,000 call wall about 8,025. For NQ, the QQQ gamma flip maps to roughly 28,537 and the QQQ put wall to roughly 26,784. These levels move daily with open interest; FinzData publishes point-in-time GEX every evening.

Micron -34.0% and AMD -30.9% since Oct 6; Amazon, Apple, Microsoft held. AI multiples down ~35% since May; memory -60%, semis -52% (J.P. Morgan). Each $100bn of AI capex is worth ~$9 of S&P 500 EPS (J.P. Morgan).

The unwind was selective. Micron lost 22.0% last week and is 34.0% below its October 6 close; AMD, Broadcom, Nvidia and Oracle are 20-31% lower. Amazon rose +7.9% on the week and is above its October 6 level, as are Apple and Microsoft. J.P. Morgan estimates AI multiples have compressed about 35% since May, including semis 52%, memory 60% and hyperscalers 14%, and sees the positioning flush as an attractive entry point for AI upstream names.

J.P. Morgan's strategists calculate that AI-linked multiples have compressed about 35% since May: memory 60%, semiconductors 52%, processing units 50% and hyperscalers 14%. The S&P 500 multiple has fallen roughly four turns since January, one of the sharpest de-ratings outside a recession, while earnings grew at double-digit rates. Prices are falling faster than earnings, which is how a valuation reset differs from an earnings recession.

Goldman Sachs' mover tables show the pattern: the worst performers were the year's biggest winners in storage and semiconductors, Seagate, Western Digital, Sandisk and Marvell, each down 27-28% on the week after 12-month gains of 143-551%. The best performers were mostly last year's laggards. The median S&P 500 stock was flat on the week while the index fell 3%.

J.P. Morgan estimates every $100 billion of AI capex adds about $9 to S&P 500 earnings per share, so a mid-range $1.5 trillion of 2027 spending would add about $18 against consensus. The risk is political: about 40% of planned US data-center capacity sits in states that want to pause, and Texas' governor-elect has promised protections on power and water costs. J.P. Morgan sees the midterms as a clearing event and expects data-center headwinds to be less onerous than priced; The Wall Street Journal reports AI leaders are reckoning with what the backlash means for compute.

Goldman Sachs finds SpaceX's index impact much smaller than feared. Its float has risen to about a third of shares from 5% at the IPO, and ETFs owned about $30 billion of the stock at the end of October. Excluding SpaceX would lower the Nasdaq-100's P/E by less than half a turn, and index return and volatility are almost identical with or without it. The next flow event is the Russell 1000 Growth rebalance on December 11, which Goldman estimates would drive more than $10 billion of passive buying; S&P 500 eligibility is likely in the second half of 2027.

Power and grid names with data-center exposure fell after Tuesday's elections: Quanta Services -12.9%, Vistra -9.8%, NRG -8.1%. Goldman Sachs' utilities team sees the data-center risk in Texas and Georgia as mainly a timing issue rather than a demand issue, and calls the 20%+ drop in specialty contractors such as PWR and MTZ overdone. First Solar rose +15.3%: Goldman notes a Democratic House lowers the risk of further credit cuts, and after the 2018 midterms the TAN solar ETF rose about 40% over the following year.

Largest 20-day multi-strategy de-gross outside Covid (J.P. Morgan). Momentum crowding 100th -> 76th percentile; CTAs net short; ~$50bn of vol-target selling left. SPX dealers short 89bn of gamma per 1%; VIX above VIX3M.

J.P. Morgan's prime and positioning data show hedge funds lost 1.6% globally on Thursday, more than three standard deviations and the worst day since April 4, 2025. Multi-strategy funds cut gross exposure by the most over 20 days outside Covid; in the past, once that measure fell below the 5th percentile, alpha was higher over the next 20 days in 9 of 10 cases. Net leverage is near 12-month lows and momentum crowding has dropped from the 100th to the 76th percentile. J.P. Morgan's US Tactical Positioning Monitor is at the 20th percentile but its four-week change has not reached the -1.5z level it treats as an attractive entry.

J.P. Morgan's strategists argue the de-leveraging is far along: leveraged ETFs sold about $60bn on Thursday and $35bn the Friday before, CTAs have flipped net short and volatility-targeting funds have cut leverage from the 65th to the 30th percentile, with perhaps $50bn left to sell. Announced buybacks of $1.2 trillion add support. Goldman Sachs' sentiment indicator is a modest 0.6 standard deviations, so positioning is no longer stretched but not washed out either.

Gathering the positioning readings on one scale shows the reset: J.P. Morgan's momentum crowding has fallen from the 100th to the 76th percentile and vol-targeting leverage from the 65th to the 30th, while its Tactical Positioning Monitor sits at the 20th percentile and its dealer gamma imbalance at the 12th. FinzData's SPX net dealer gamma is at the 20th percentile. Positioning is no longer crowded, but J.P. Morgan notes the four-week change has not yet reached the level it treats as a capitulation signal.

FinzData's point-in-time GEX shows SPX dealers net short 89bn of gamma per 1% move after Thursday's close, in the 20th percentile of readings. Spot (7,354) is 3.6% below the gamma flip at 7,627, with the largest put open interest at 7,000 and calls at 8,000. In short gamma, dealer hedging adds to moves in both directions. In FinzData's SPY gamma-regime study (4,223 sessions since 2010), next-day moves averaged 0.90% after short-gamma closes versus 0.46% after long-gamma closes. QQQ is also short gamma, with spot 657 about +5.4% below its 693 flip.

The VIX jumped from 16.61 on Wednesday to 28.18 on Thursday and closed the week at 25.64. It sits above the three-month VIX3M (24.60), so the volatility curve is in backwardation, the FinzData Quantitative Model label as of November 6. Inversions mark acute stress and have tended to be short-lived; a return of VIX below VIX3M is the first sign the de-risking is done.

WTI -12.8% as a high-$20s risk premium unwound (Goldman Sachs). Hormuz still logs 3.7 transits a day in FinzData shipping data. J.P. Morgan: Brent ~$90 if the US stays; $105-110 if it withdraws.

WTI front-month futures fell $13.29 (-12.8%) to $90.83 as US-Iran deal hopes rose after the election. Open interest fell -17.3% between Oct 30 and Nov 5, consistent with long liquidation rather than new shorts. FinzData Global Macro Pulse shows the Strait of Hormuz still nearly closed: 3.7 vessel transits and 0.9 tankers a day on average from October 10 to November 1. Prices have moved ahead of physical flows; if talks stall, that gap is the risk.

J.P. Morgan's commodity desk puts even odds on further strikes followed by a declaration that military action is over, and on diplomacy being given more time. In the strike case, a continued US presence securing Hormuz would leave Brent near $90 longer term, while a withdrawal could take it to $105-110 within a week; the diplomacy case means $4-5 lower and a 7-10 point drop in oil volatility. Goldman Sachs notes Middle East physical crude flows are back near pre-war levels, while FinzData's chokepoint data still counts only 3.7 transits a day through Hormuz itself, so much of the oil is taking other routes.

Oil equities tracked crude lower: Exxon -11.4%, Chevron -9.7% and the E&P ETF -14.7%. Goldman Sachs estimates the geopolitical risk premium had built to the high $20s a barrel and accounted for most of October's rally; its E&P coverage still trades at about a 14% free-cash-flow yield on a conservative $73/$68 Brent/WTI mid-cycle deck, and it prefers Chevron to Exxon.

Goldman Sachs' energy, utilities and mining analysts went sub-sector by sub-sector after the election. In brief: data-center uncertainty is a timing issue for utilities, clean tech faces less policy downside, midstream growth is supported by projects already sanctioned, the specialty-contractor selloff looks overdone, and oil equities are pricing a falling geopolitical premium against conservative mid-cycle valuations.

10-year 4.86%, 45bp off its October high; HY spreads at a 375bp YTD high (J.P. Morgan). CPI Tuesday: J.P. Morgan sees core +0.23% m/m; our nowcast reads stagflation. Q3 EPS +31.4% (FactSet); J.P. Morgan and Goldman both target 8,000 by year-end.

The 10-year Treasury yield ended at 4.86%, down 7bp on the week and 45bp below its October 5 closing high of 5.31%, as lower oil eased inflation fears. It remains above the 4.66% of early August. With a December Fed hike still debated, Tuesday's October CPI is the next test for the bond rally.

J.P. Morgan's fixed-income strategists still expect a 25bp Fed hike in December and see risks of front-end yields reversing higher, but stay neutral duration for now. They see five-year breakevens near 12-month lows and cheap to fair value, and recommend hedging swap-spread and volatility trades against Nasdaq-100 moves. High-grade spreads were unchanged on the week despite heavy hyperscaler supply, while high-yield spreads widened 12bp to a year-to-date high of 375bp; leveraged loans tightened to 511bp.

J.P. Morgan Economics expects October CPI to rise 0.25% month on month (3.9% year on year) and core 0.23% (3.2%), with PPI up 0.6% (6.8% year on year) and core PPI 0.4% (5.1%). Its rates team notes the CPI forecast is above market pricing. The labor market remains firm: payrolls beat expectations, initial claims are at a 52-week low and announced job cuts are down 52% from a year ago. Chief US Economist Mike Feroli points to a 33,000 rise in professional, scientific and technical jobs, the area most exposed to AI job-loss fears. FinzData's nowcast puts October in the stagflation quadrant, with core PCE tracking about 3.2%.

Every risk label in the FinzData Quantitative Model points the same way: market-stress probability above 99.9%, financial conditions, risk appetite and credit direction all tightening, dealers short gamma and the volatility curve in backwardation. Credit stress is still benign and liquidity is flat, so this is a risk-appetite shock rather than a funding one. The October nowcast has moved to stagflation, growth below trend with inflation rising and core PCE tracking about 3.2%, which is why Tuesday's CPI matters.

With 88% of the S&P 500 reported, FactSet's blended third-quarter earnings growth is 31.4% on revenue growth of 14.3%, and all 11 sectors are growing. Surprises are smaller than usual (2.7% vs a 7.5% five-year average) and the market is neither rewarding beats nor punishing misses as much as normal. Goldman Sachs forecasts S&P 500 EPS of $375 for 2026, $415 for 2027 and $460 for 2028. J.P. Morgan notes Magnificent 7 earnings growth is now below that of the other 493 companies and Europe's median growth has overtaken the US for the first time since late 2024.

J.P. Morgan's Head of Global Markets Strategy, Dubravko Lakos-Bujas, reiterated a year-end S&P 500 target of 8,000 ($365 EPS at 21.9x), +8.4% above Friday's close, and expects about 20% EPS growth in 2027. Goldman Sachs also targets 8,000 for year-end 2026 and 8,700 over 12 months, with the index on 18x forward earnings. J.P. Morgan's trade ideas: long 12-month vs short 3-month momentum (effectively tech vs energy and defensives), AI upstream on the positioning flush, and caution on consumer cyclicals until mortgage rates approach 6%.

After 20 midterms the S&P 500 rose in 18 in the next three months (Bloomberg Intelligence). Our read: a positioning flush in an earnings boom; CPI and Dec 9 decide the path. Three scenarios with the data that would confirm each.

Bloomberg Intelligence's study of 20 midterms since 1946 shows the S&P 500 rose in the three months after the election in 18 cases, by a mean 7.5% and median 7.2%, against 1.8% and 2.1% in the three months before. The only declines were 2002 (-7.8%) and 2018 (-0.9%). In the four years when the President's party lost both chambers, as in 2026, the average gain was 6.8%. This cycle the index fell 0.4% in the three months before November 3 and is 2.5% lower three sessions after it, so history would need a strong finish to the window to repeat.

The Wall Street Journal reports that the election gives Democrats the strongest check yet on the President's influence over the Fed, since a Democratic Senate can block board nominees. State results matter for AI infrastructure, with Texas and Georgia governors-elect planning data-center protections. Goldman Sachs notes existing steel tariffs stay in place absent formal action, and J.P. Morgan sees tax-exempt municipals richening on better technicals. In market structure, Cboe is suing over the CFTC's approval of single-stock perpetual futures, and Nvidia's board is reviewing reports that its CEO was targeted by a foreign espionage effort.

Set side by side, the Street's views and FinzData's measurements agree that the selloff is a positioning event and that credit is not signalling stress. They differ on timing: dealer gamma and the inverted VIX curve say forced flows are not yet over, and shipping data say oil has priced a reopening of Hormuz that has not happened.

Our read: last week was a forced de-grossing of crowded AI positions inside an earnings boom, not the start of an earnings recession. Much of the forced selling is done, but dealers are short gamma and the VIX curve is inverted, so the market remains fragile. Oil has priced a deal that shipping data do not yet show. The decisive data point is Tuesday's CPI: a soft core print supports the rebound that midterm history and Street targets point to; a hot one revives the December hike.

We frame three paths for the next four weeks. A soft core CPI and extended US-Iran talks would let SPX reclaim its 7,627 gamma flip and the VIX curve normalize. An in-line print without a Middle East resolution keeps the market in a choppy rotation. A hot core print that revives the December hike, or renewed strikes, would push SPX toward the 7,000 put wall with oil and yields higher.

Times are given in New York and Central European time for our readers in Europe. Monday brings the New York Fed's inflation expectations and earnings from Constellation Energy, NRG, Occidental, KKR, The Trade Desk, Rocket Lab and others. October CPI on Tuesday at 08:30 New York (14:30 CET) is the week's main event, with J.P. Morgan forecasting +0.25% headline and +0.23% core. The bond market is closed Wednesday. PPI and US-Iran diplomacy follow. Further out: monthly options expiration on November 20, the FOMC on December 8-9 and the Russell 1000 Growth rebalance on December 11.