Original author: Long Yue

Original source: Wall Street Watch

The shadow of deleveraging in US stocks has not yet dissipated.

According to Chase Trading Desk news, the global markets strategy team at JPMorgan published a report on July 15, indicating that the deleveraging process initiated by investors in the US in June is still ongoing. There is further room for deleveraging in three areas: leveraged stock ETFs, the options market, and margin accounts, which will continue to suppress stock market performance in the coming months.

They estimate that it will take about three months of volatile market conditions to bring the ratio of leveraged stock ETFs relative to the underlying market capitalization back to levels seen before April.

Leveraged ETFs: Self-Correcting Mechanism Activated, but a Long Way to Go

The issue with leveraged stock ETFs is essentially a mathematical trap.

The bank explained the logic behind it: Suppose the underlying index drops by 10% one day and rebounds by 11.1% the next day back to its original position; a 3x leveraged ETF would incur a loss of 30% on the first day and gain back 33.3% on the second day, resulting in a net loss of 7%. That is to say, the volatility itself will erode the size of the leveraged ETF, which is an inherent “self-correcting” mechanism.

Data has confirmed this point. Analysts have shown that since the peak, the size of leveraged semiconductor stock ETFs has shrunk by 34%, while the size of all leveraged stock ETFs has decreased by 13%.

However, the problem is that the decline in ratio relative to the underlying stock market capitalization is much smaller.

JPMorgan analysts pointed out that the ratio of the size of semiconductor stock leveraged ETFs to the underlying market capitalization is three times the average level of all stock ETFs, which explains why semiconductor stocks are far more volatile than the market. More alarmingly, even the overall leveraged stock index ETFs have their ratio relative to their historical levels still high, indicating that this is not just an issue with individual sectors, but is a systemic risk for the entire market.

Analysts judge: "It will take about another three months of volatile range trading for the ratio of leveraged stock ETFs to the underlying market capitalization to return to the levels seen prior to April."

Moreover, new capital continued to flow into leveraged ETFs in July, further extending the time needed for deleveraging.

Options and Margin Accounts: Two 'Minefields' for Retail Investors

In the options market, the JPMorgan analysts tracked a bullish options buying indicator from retail investors (based on OCC data, counting customers holding less than 10 contracts), which peaked at nearly 14 million contracts on June 5, matching historical highs seen in October 2021 and October 2025.

Historical patterns show that each time this indicator peaks, tech stocks experience several months of adjustment, often bottoming when this indicator falls to low levels of 2 to 4 million contracts. Currently, this indicator has fallen significantly from its peak, but analysts believe that if it ultimately falls to the "surrender" level of 2 to 4 million contracts, tech stocks will still face ongoing pressure.

In terms of margin accounts, the situation is even more severe. Analysts used the NYSE Net Debit Balance as a proxy indicator for US individual investors' leverage, revealing that current levels are at a historically extreme high, comparable to peaks seen at the end of 2021 and mid-2018—both of which were followed by several months of market correction.

Analysts pointed out that margin accounts have shown some signs of retreat recently, but "a significant deleveraging is still needed to avoid posing significant resistance to the stock market."

In contrast, the leverage in risk parity funds has largely returned to normal, no longer being a major source of market resistance.

Hedge Funds: Exposure to Semiconductors May Have Shrunk Quietly

At the hedge fund level, the bank's data shows an interesting shift.

In June, despite the declines in the S&P 500 and NASDAQ indexes, equity long/short hedge funds and technology sector hedge funds recorded positive returns of 1.2% and 3.7%, respectively. Analysts believe this is closely related to the strong performance of the semiconductor sector— the SMH semiconductor ETF rose by 9.5% in June, while large-cap cloud computing stocks fell by 14.5% during the same period.

But moving into July, signals changed. The daily reports showed that the correlation between equity long/short funds and semiconductor stocks significantly declined, and the analysts' high-frequency leverage proxy indicator also indicated a decrease in leverage levels in July—previously this indicator had reached its highest level since 2017 in June.

Based on this, JPMorgan has determined that equity long/short hedge funds may have reduced their exposure to semiconductors in July.

Supply and Demand in the Second Half of the Year: Retail Capital is the Biggest Support

Deleveraging is a short-term resistance, but analysts also point out that from a longer-term perspective, the stock supply and demand structure remains positive, which will provide support after the deleveraging pressure fades.

Analysts summarized the capital flow forecasts of various investors:

Demand Side:

• Retail investors are the largest supporting force. Since the beginning of the year, inflows have reached about $550 billion, and the total for the year is expected to exceed $1 trillion, with approximately $482 billion still expected to flow in the second half of the year.
• Sovereign Wealth Funds/Central Banks: Expected to contribute about $110 billion in stock demand for the year, half of which is expected in the second half.
• Equity Long/Short Hedge Funds (managing approximately $1.4 trillion): Have net bought about $20 billion since the beginning of the year, but analysts expect almost no further increase in positions in the second half.
• CTA Trend Following Funds: Momentum signal z-value is around 1.0, and net buying is expected to be close to zero in the second half.

Pressure Side:

• Pensions and Insurance Companies: Structural reduction in stock holdings, expected to net sell about $470 billion in stocks throughout 2026, with approximately $235 billion in the second half.
• Balanced Mutual Funds: Have net sold about $210 billion in stocks since the beginning of the year, mainly concentrated in June.

In summary, analysts expect the net demand for stocks in 2026 to be about $475 billion, with net supply estimated at about $200 billion (including three major AI-related IPOs), resulting in a net demand of about $275 billion, of which approximately $197 billion is expected in the second half.

Analysts specifically note that this positive supply-demand balance is not contradictory to the deleveraging pressure—"The deleveraging process is likely to dominate the market in the coming months, causing significant price volatility, while the stock supply-demand balance is more of a background long-term force that will provide support once the deleveraging subsides."

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