AI Bubble Burst? Hedge Funds Go Crazy Shorting Semiconductor Stocks

Two weeks ago, a trader from Morgan Stanley said that the hype around artificial intelligence (AI) is diminishing, as users are disappointed with the experience of these products. Last week, Vanda Research released a report stating that the appeal of AI-related stocks is steadily declining, with retail investors reducing their net buying of AI stocks.

Goldman Sachs' recent report on its Prime Brokerage (PB) business also poured cold water on the AI frenzy. The report states that investors are no longer buying US semiconductor and semiconductor equipment stocks, which have underperformed the market significantly in the past six weeks. Since the beginning of August, the S&P 500 index has dropped by 2.8%, while the Philadelphia Semiconductor Index has fallen by 9.8%, recently breaking below the 50-day moving average and the 100-day moving average.

Goldman Sachs' PE data shows that in the recent weak stock price environment, hedge funds have been heavily selling semiconductor industry stocks in nominal value terms. These stocks have been the most net sold not only in the technology sector but also across all sectors.

Specifically, since reaching a high for the year in early July, the ratio of long and short positions in US semiconductor and semiconductor equipment stocks recorded by Goldman Sachs PE has decreased by 25% to 1.12, reaching a record low of 0.75 at the beginning of this year.

What is even more surprising is that in the past month, excluding market value pricing, the inflow of short positions in individual semiconductor and semiconductor equipment stocks recorded by Goldman Sachs PE has increased by 20%, while the overall capital flow of short positions in US stocks has only increased by 4% during the same period.

Semiconductor stocks currently account for nearly 40% of the market value of US Information Technology (IT) stocks, approaching a multi-year high. The problem is that the larger the size, the harder the fall.

On Tuesday, Nvidia, the semiconductor stock with the highest market value and the biggest winner in the AI frenzy this year, fell more than 2% during trading and closed down by about 1%. After rebounding on Monday, it returned to a downward trend, hitting a low since August 18 and still maintaining an accumulated increase of about 200% since the beginning of the year, but falling by more than 7% in the past month.

On Tuesday, the major US stock indices, which barely halted their sharp decline on Friday, returned to a downward trend. Both the S&P 500 and the Nasdaq hit three-week lows, while the Dow Jones Industrial Average hit a new low of over a week.

Some commentators have suggested that Nvidia's rebound on Monday was due to some short covering, but it is unknown how much room there is for further short covering to not only save Nvidia but also the broader market.