UBS: Momentum Stock Sell-Off Nears End, Time to Gradually Position in AI and Semiconductors

According to the latest observations from UBS's trading division and prime brokerage business, the recent sharp sell-off in momentum stocks may be nearing its end, creating a favorable opportunity for investors to rebuild positions in artificial intelligence (AI) and semiconductor stocks.

On Tuesday (21st), Asian semiconductor stocks and technology-heavy markets such as South Korea and Taiwan staged a strong rebound after several days of declines, indicating that investors are gradually returning to these oversold AI-related targets.

Part of the reason for this bottoming and rebound is that most speculative positions have already been closed. UBS prime brokerage data shows that hedge funds recently reduced their long positions in momentum and semiconductor stocks by approximately 5% of market capitalization—one of the largest de-leveraging actions on record. Currently, net holdings in semiconductor and software stocks have fallen back to April 2024 levels, suggesting that most speculative positions have been cleared.

Michael Romano, Head of Hedge Fund Equity Derivatives Sales at UBS, emphasized in a report that the ongoing improvement in AI fundamentals is a key signal for "buying on dips." However, he advises investors to adopt a "gradual entry" strategy rather than rushing into the market.

Romano pointed out that current positioning is increasingly tilting in favor of a momentum stock rebound, and he expects this sell-off wave to bottom by the end of July at the latest—or may have already bottomed.

Additionally, the rotation of market capital flows warrants attention. The recent rally in cyclical sectors such as banking and industrials has been driven primarily by short covering rather than new long inflows. UBS warns that once capital flows back into AI and momentum stocks, these recently strong cyclical sectors could face pullback pressure.

Currently, UBS's momentum stock basket includes companies such as Microsoft (MSFT-US), Broadcom (AVGO-US), Oracle (ORCL-US), Sandisk (SNDK-US), and Datadog (DDOG-US). With the software stock basket having rebounded approximately 20% since the end of June, Romano expects that once market sentiment officially reverses, a liquidity-driven sharp rally may follow.