Is "East Rising and West Falling" unstoppable? Wall Street speculators suffer a "bloodbath," with leveraged ETFs losing up to 40%
Due to a series of disappointing economic reports and concerns over U.S. trade policies, the risk tolerance in the U.S. stock market has decreased, and speculative products have been severely impacted. Leveraged ETFs have lost as much as 40%, particularly those related to Bitcoin and overvalued tech stocks. The market is under increased selling pressure, and the decline in consumer confidence is the largest since August 2021, indicating that the uncertainty in the economic outlook is putting pressure on households
According to Zhitong Finance APP, a series of disappointing economic reports combined with concerns over U.S. trade policies have suppressed the risk appetite across the U.S. stock market. Currently, speculative products are heavily impacting investors.
From leveraged bets on overvalued tech companies to complex options trading and various cryptocurrency speculations, the sell-off that has caused the major U.S. stock indices to decline for four consecutive days is most evident in the exchange-traded funds (ETFs) favored by retail investors.
An extreme example is two leveraged ETFs related to Michael Saylor's Bitcoin accumulation company Strategy (MSTR.US), which once had a total market value exceeding $5 billion but has now dropped about 40% in just three days. Leveraged funds promising to double daily returns from NVIDIA Corporation (NVDA.US), Tesla Inc. (TSLA.US), and Amazon.com Inc. (AMZN.US) have also plummeted. The threefold leveraged bets on innovative stocks and semiconductor stocks have fallen by 20%.
Max Wasserman, senior portfolio manager at Miramar Capital, stated, "When market trends are in your favor, going with the flow can be very effective, but once the situation reverses, you need to be cautious. It's like trying to catch a falling knife with your bare hands."
While it is difficult to pinpoint the direct trigger for this sell-off, selling pressure clearly increased last Friday after data on existing home sales, consumer confidence, and business activity all fell short of expectations. On Tuesday, the Conference Board reported that U.S. consumer confidence dropped this month by the largest margin since August 2021 due to concerns about the overall economic outlook, further proving that the uncertainty of the Trump administration's policies is putting pressure on American households.
Exchange-traded products linked to companies like NVIDIA use financial derivatives to amplify returns or achieve inverse returns and have also been affected in past market crashes. Nevertheless, enticed by high returns, retail investors continue to flock to these products. Although these products account for a small share of stock investments, they are growing rapidly, with most being bullish bets. Bloomberg Intelligence analysis shows that earlier this month, approximately $95 billion in assets were invested in products that use derivatives to take long positions on individual stocks or indices, while strategies betting on declines attracted only $9 billion.
Despite the recent performance of these funds being unsurprising, as their design is intended to provide high-risk, high-return investment avenues regardless of market changes, their extreme popularity may amplify the impact on market sentiment. Peter Tchir of Academy Securities noted that as cryptocurrencies and related securities develop, this risk becomes increasingly pronounced He pointed out: "It's all greed at play. The stocks with the largest gains attract aggressive investors eager to profit using leverage. Those that are currently underperforming will concentrate on some of the previous big winners, which were popular choices when aggressive quick money flowed into single-stock leveraged ETFs."
The losses are not limited to leveraged trading; ordinary bets on tech companies and other potential innovative firms have also not escaped unscathed. On Tuesday, the index measuring the performance of the "Magnificent Seven" large-cap stocks fell by as much as 3.4%.
The ARK Innovation ETF (ARKK.US), managed by Cathie Wood and with a scale of $6.2 billion, is a favorite among retail investors, and its net asset value fell by as much as 6.7% on Tuesday. A series of speculative tech companies, including the fund's largest holdings Tesla (TSLA.US), Roku (ROKU.US), and Palantir Technologies (PLTR.US), saw their stock prices decline, dragging down the fund. This flagship ETF may experience capital outflows for the 14th consecutive month, reducing the assets under management of her actively managed ETFs to about $12 billion, a significant drop from $60 billion four years ago.
Matt Maley, chief market strategist at Miller Tabak + Co., stated: "There is no doubt that market optimism is fading. Last week, the stock prices of companies like Palantir, Tesla, and Meta fell, marking the beginning. Now, the sharp decline in Bitcoin further highlights this trend."
However, the market's calls for "the East rising and the West falling" continue to spark heated discussions. The AI investment boom that has fully ignited the Chinese stock market has driven Chinese tech stocks, favored by global funds this year, to maintain strong upward momentum. This super wave of artificial intelligence is enough to rival the "mad bull" market of U.S. tech stocks in 2023.
On February 26, the Hang Seng Index opened up 0.89%, and the Hang Seng Tech Index rose 1.14%. Tech stocks performed strongly, with Xiaomi Group and JD Group rising nearly 2%, Meituan up 1.58%, and Alibaba up 1.3%