U.S. stocks and cryptocurrencies have experienced consecutive sharp declines. What happened? Retail investors are collapsing!

Recently, the U.S. market has been turbulent, with warnings from financial giants leading to significant declines in U.S. stocks and Bitcoin. What has happened behind this wave of selling?

Last week, super tycoon Cohen and "stock god" Buffett issued warnings in succession. Cohen expressed negative views on the U.S. economy last Friday and stated that he has increased his short positions. Notably, this is his first shift to a bearish stance since Trump implemented aggressive trade policies.

He believes that punitive tariffs, immigration enforcement, and federal spending cuts will adversely affect the U.S. economy, predicting that economic growth will slow from 2.5% to 1.5% in the second half of this year, and that U.S. stocks will also see a significant correction.

Coincidentally, "stock god" Buffett's Berkshire has sold stocks for nine consecutive quarters, with cash reserves reaching a record high of $334.2 billion. Buffett issued a rare warning in his shareholder letter, stating that "fiscal foolishness" will destroy currency.

The pessimistic expectations of these two investment giants undoubtedly sounded the alarm for the market. Subsequently, U.S. stocks fell continuously, and Bitcoin plummeted, spreading panic in the market.

The warnings from the tycoons were not unfounded, and the market reacted sharply. The S&P 500 and Nasdaq indices both experienced four consecutive declines, with the Nasdaq dropping about 5% during this period, and popular themes (such as long-term growth, artificial intelligence stocks, and "election" stocks) continued to be under pressure.

The market capitalization of the "seven giants" has lost $1.5 trillion so far this year, with a decline of over $900 billion in the past week.

Meanwhile, the cryptocurrency market has also been affected. Bitcoin's price fell by 6% on Tuesday to $88,245, marking the lowest level since November last year.

What is even more concerning is that even with interest rates being lowered (the yield on the U.S. 10-year Treasury bond fell to about 4.29%), there has been no "relief" for stocks and long-term bonds. Goldman Sachs' top TMT trader Peter Callahan described Wednesday as "another uncomfortable day."

The fear index (VIX) has risen back to its highest point since the beginning of the year, with the market moving from "historical highs" to "extreme fear" in just five days.

What happened behind this round of sell-off? Has the pullback ended?

Retail investors retreat, momentum stocks hit hard, this round of pullback has not stopped

The main reasons for the recent sell-off in stocks, cryptocurrencies, and most risk assets can be summarized as follows.

First, the retreat of retail investors, with Trump's policy shift accelerating capital outflows. Matt Reiner, Chief Cash Trader at JPMorgan Chase, pointed out:

Bank stocks, cryptocurrencies, and other assets viewed as "retail" investment targets surged after the election due to expectations of deregulation, but as the Trump administration focused on issues like immigration, tariffs, and DOGE, this excitement is rapidly fading, leading to a significant withdrawal of retail funds.

Furthermore, while retail investors seem to be at the center of the recent crisis, hedge funds are also showing signs of capitulation, forced to reduce positions due to losses in external investments.

Goldman Sachs analyst Chloe Garber also pointed out that recent hedge fund reductions have intensified the negative feedback loop:

With retail buying dormant, hedge fund momentum strategies have been re-triggered, leading to further sell-offs. The market is in a negative feedback loop. Hedge fund activity is at a 9 out of 10, indicating a very high willingness to reduce positions.

On the other hand, Momo momentum stocks have been hit hard. Goldman Sachs data shows that Fins MOMO (financial momentum stocks) have fallen 9% in the past few trading days. TMT MOMO (technology, media, and telecommunications momentum stocks) has dropped about 19% from its 52-week high, approaching the 15-20% pullback level seen in the past two years. "Momo" refers to the momentum investment strategy, which chases stocks that have performed strongly recently.

Additionally, CTA (Commodity Trading Advisors) short-term momentum is negative, and there is a large supply of U.S. stocks that need to be sold before the weekend. If the mid-term momentum turns negative, the supply could increase to over $20 billion. Meme stocks (GSXUMEME INDEX) have also fallen for five consecutive days.

Looking further ahead, Nvidia (NVDA) will release its earnings report this week, but the holdings of mega-cap growth stocks and technology stocks remain at a very high level (97th percentile), far above the levels implied by earnings growth. If the performance falls short of expectations, it could trigger further sell-offs. If market sentiment reverses, these overvalued stocks are likely to continue facing sell-offs

Currently, the market is looking for incremental buyers. As both CTA and L/S (hedge funds) are selling off, the question is when and where confidence and support will reappear in the market. Reiner believes that Wednesday was definitely not the most painful day, the adjustment may only be 1/3 to half complete, and there is still significant room for further movement, making it difficult to say the market has bottomed out.