This article is from:The Kobeissi Letter

Translation｜Odaily Planet Daily（@OdailyChina）；Translator｜Azuma（@azuma_eth）

What exactly happened?

The Nasdaq 100 Index just recorded its largest single-day decline since the pandemic in 2020, and the S&P 500 Index lost $3 trillion in market value today.

Just 24 hours ago, following the Democratic "sweep" in the midterm elections, the Dow Jones Industrial Average surged by 1,600 points.

To better understand what happened today, we first need to break down the price movements in the market.

At the opening, U.S. stocks were down less than 1%, but starting at 10 AM Eastern Time (11 PM Beijing Time last night), the selling pressure gradually increased.

Subsequently, the market kept forming lower and lower rebound peaks, with selling pressure persisting.

On a trading day like today, investors need to ask themselves a question—what fundamental change has occurred? Why did the S&P 500 Index just gain $1.2 trillion in market value 24 hours ago, yet today it evaporated $3 trillion?

We have delved into the fundamental factors that may have contributed to today's market decline. Among them, one factor stands out, yet it still cannot fully explain today's market performance.

Yesterday afternoon, a Democratic congresswoman posted on X, initially just a tweet expressing personal opinion, but by today, it has garnered over 12 million views, with multiple congressional members publicly expressing support.

• Odaily note: The original text refers to Democratic Congresswoman Yassamin Ansari from Arizona, who posted yesterday that the most important agenda for the Democrats right now is to pause the development of advanced AI, regulate the uncontrolled industry, and ban artificial superintelligence.

On the surface, the market may be pricing in the so-called AI "ban" or strict regulatory measures.

However, in our view, it is almost certain that the U.S. will not truly ban AI. Even if such a ban is feasible in execution, it would mean the U.S. voluntarily relinquishing its status in the global AI race and giving up its competitive advantage to other countries. This will not happen.

We believe that today's decline is more technical rather than a fundamental change.

Prior to this, the market was already concerned about the profitability of AI, capital expenditure (CapEx), and free cash flow.

After the midterm election results were announced, the VIX panic index dropped significantly, leading to a brief market rebound. However, earlier today, as selling pressure continued to accumulate, market sentiment shifted, and previous concerns were rapidly amplified.

The concentrated sell-off in chip stocks particularly illustrates this point. Today, the S&P 500 Index excluding tech stocks fell about 2.5%, while chip stocks fell nearly 11%.

AI trading has begun to become "nervous," and today's market decline is largely a result of spreading fear and a shift in market sentiment.

Next is the leverage factor. Currently, market leverage levels are at historical highs, and investors further increased leverage during the buying spree before the midterm elections.

In October, U.S. leveraged ETFs attracted a net inflow of $15 billion, marking the largest single-month rolling net inflow in at least two years. This further amplified today's declines.

The volatility index VIX also proves that today's sell-off had strong emotional characteristics. Today, the VIX index surged 63%, marking the fifth largest single-day increase in recent history.

We also believe that during today's trading session, several large institutional participants faced forced liquidations.

This is also why we need to take a longer view.

The results of the midterm elections will undoubtedly bring some changes to the market, economy, and policy, but this does not mean the AI story has "ended."

This is just an adjustment. We are still in the largest technological revolution in human history.

Finally, technical corrections are healthy.

Even if the market drops 5% to 10% from current levels, it is still considered a "healthy adjustment."

Historical data shows that midterm elections often present excellent buying opportunities. Since 1950, the S&P 500 Index has averaged a 17.2% increase in the year following each midterm election.

Currently, the market is facing one of the most uncertain periods in recent history.

The fact is, volatility is both normal and healthy for the market.

Over the past four years, many investors have forgotten this, and today’s price movements just prove this point.

We expect several major events to occur in the fourth quarter.

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