Written by: Rita

Global information technology stocks faced the largest scale of long selling since 2014 last week. Goldman Sachs' position tracking report noted on August 3 that AI momentum unwinding in the past two weeks has evolved into a systemic deleveraging event, with the scale of long selling in information technology stocks over two consecutive days reaching the second highest level in nearly a decade. The trigger for deleveraging is the unwinding of AI momentum, unrelated to defensive macro hedging. After the leverage of retail investors in South Korea and Japan reached historic extreme levels, a reversal began, and U.S. retail investors are also reducing their holdings in semiconductor stocks. Hedge funds' total leverage has given back half of its gains this year, with net leverage turning negative for the year. Goldman Sachs judges that the intensity of deleveraging has peaked, but the inertia of capital outflows is still ongoing, and position repair will take time.

Hedge funds substantially deleverage, with information technology stock sell-off reaching a ten-year second high

Goldman Sachs' prime brokerage data shows that last week’s long selling of global information technology stocks was the largest since 2014, with the total sell-off over two consecutive days ranking second in nearly a decade. The speed and concentration of deleveraging are extremely high, which Goldman Sachs describes with the term "extreme" to characterize the intensity of this round of unwinding.

Hedge funds have significantly reduced their leverage levels over the past two weeks. Total leverage has given back half of its gains for the year, and net leverage has turned to a net decline this year. Goldman Sachs points out that the deleveraging in July was a proactive systemic reduction of holdings, exceeding the scope of ordinary profit-taking. The rebalancing pressures from passive funds are forming, and CTA strategies have also begun to join the selling ranks after breaking key support levels.

This round of deleveraging is fundamentally different from previous rounds. Goldman Sachs' risk appetite indicator remains at a relatively high level of 0.8, indicating that capital is reducing positions in specific sectors, with insufficient evidence for a comprehensive risk-off. Capital has not left the market; it is being redistributed. A considerable portion of the funds that flowed out of the technology sector has entered bond funds and money market funds. The fund flows into equity funds remained resilient in July, and bond funds and money market funds are the main forces for fund inflows this year.

Retail leverage peaks and declines, while Asian retail investors leverage to extremes

The leverage behavior of retail investors has amplified the extent of this round of volatility. The financing balance of the South Korean stock market surged to an all-time high in July, and then began to reverse. The financing purchases in the Japanese stock market have also reached the highest level since 1990. Goldman Sachs believes that retail leverage in developed Asian markets is highly concentrated; once the market turns, the impact of deleveraging will far exceed institutional unwinding.

U.S. retail investors are also reducing their holdings in semiconductor stocks. Strong inflows since the beginning of the year reversed in July, and the asset scale of leveraged ETFs has significantly retreated after rapid expansion in the previous period. The technology leveraged ETFs in South Korea and Taiwan have similarly experienced a process of "ups and downs," and South Korean financial authorities have introduced new regulations targeting individual stock leveraged ETFs to curb speculation.

The signals from the options market are more complex. The implied volatility of individual stocks has risen to the highest level since 2020, while index implied correlation remains low. Goldman Sachs believes that the combination of soaring individual stock volatility and declining correlation indicates that market discrepancies are widening. Investors are shifting from trading the overall AI sector to differentiated pricing of individual stocks. This is good for stock pickers but bad news for funds betting on sector beta.

VIX short positions cleared, Japanese yen and long bond options exhibit extreme volatility

Speculative net short positions in VIX futures have basically cleared, and the short positions of leveraged funds have retreated from extreme levels to neutral. Goldman Sachs compares this VIX short covering to the previous "volatility apocalypse" (2018) and the VIX carry unwind of 2024 to 2025, noting the high similarity in approach.

Bearish option skew in long-duration U.S. bond ETFs sharply increased after the Federal Reserve meeting, heightening market concerns about long-term interest rate risks. Implied sentiment in Japanese yen options significantly rebounded after currency intervention, but CFTC data still shows a net non-commercial position that is negative. Goldman Sachs believes that the unwinding of yen arbitrage trading has not yet been completed, and if Federal Reserve policy expectations continue to change, there may still be room for yen appreciation.

There is an important hedging signal from the capital flow level. Year-to-date inflows into bond funds and money market funds have far surpassed those into equity funds. The capital inflow into the fixed income market is structural, reflecting investors locking in profits at high interest rates. This cannot be interpreted as a bearish signal for the stock market. Equity funds saw inflows of $34 billion in July, though this ranks third historically, the absolute scale is an order of magnitude smaller than that of the bond market.

The most intense phase of deleveraging may have passed, and the extreme readings of the sell-off in information technology stocks indicate that selling pressure is waning. However, the retreat of retail leverage from historic highs has just begun, and after the completion of VIX short covering, the market still needs to find a new volatility equilibrium. The environment characterized by soaring individual stock volatility and lowering index correlation is favorable for stock pickers, but for funds long on beta, the path in August may not be smooth.

Disclaimer

This article is a compilation and interpretation by Tide Research of third-party broker research reports (Goldman Sachs, August 3, 2026), combined with publicly available market information. The ratings, target prices, earnings forecasts, and related judgments cited in the article represent the views of the analysts from that brokerage, reflect only the position of their respective institutions, do not represent the views of Tide Research, and do not constitute any investment advice.

The market has risks; decision-making should be independent. This article should not be used as a basis for buying or selling any securities.