UBS believes the recent momentum stock selloff is close to ending, opening the door for investors to gradually return to AI and semiconductor names.
The recent pullback in momentum stocks may be running out of steam, according to UBS. The bank's trading desk says improving fundamentals in artificial intelligence are creating an opportunity for investors to slowly rebuild positions in the sector.
KEY DETAILS
UBS' prime brokerage data shows hedge funds have cut long positions in momentum and semiconductor stocks by around 5% of gross market value, marking one of the biggest reductions on record. As a result, net positioning in semiconductor and software stocks has returned to levels last seen in April.
Michael Romano, Head of Hedge Fund Equity Derivative Sales at UBS, said investors should buy the dip but avoid rushing in. He recommends gradually adding exposure instead of making large purchases at once.
UBS' momentum basket includes Sandisk, Broadcom, Oracle, KKR, Datadog, and Microsoft.
Romano also expects the momentum unwind to reach its bottom by the end of July, if it hasn't already. On Friday, UBS' momentum gauge reversed sharply, moving from a 3.5% loss to a 2.5% gain within two hours, a sign that buying interest may be returning.
MARKET REACTION
A recovery in AI and momentum stocks could pull money away from recent winners such as banks, industrials, and other cyclical sectors. UBS says much of the recent buying in those areas was driven by short covering rather than fresh long-term investment.
For traders, the report suggests market leadership could shift back toward AI and semiconductor stocks if momentum continues to improve. Gradual positioning may help manage risk while taking advantage of a potential rebound.
Investors will be watching whether AI shares continue to recover through the end of July. UBS believes improving positioning and stronger AI fundamentals could fuel the next leg higher if buying momentum returns.
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Source: Yahoo Finance
Time: 11:15 AM EEST
