Morgan Stanley quantifies warning: Momentum collapse, mass selling of leveraged ETFs in US stocks, and few retail investors are picking up the pieces!

Momentum consensus trading encountered a "collapse-style" reversal on February 5th. Morgan Stanley believes that the passive selling pressure caused by crowded long positions reducing simultaneously with ETF leveraged rebalancing quickly amplified the decline. Retail buying, which should provide a buffer during a downturn, was noticeably absent, leading to insufficient marginal support. This decline exhibited a structural characteristic of "index relatively restrained, internal market severe": selling pressure was highly concentrated in Nasdaq, technology, and semiconductor sectors which had led the market and had crowded positions in high beta themes (AI, national security, bitcoin mining stocks, etc.). Conversely, sectors such as cyclical, chemical, and banking showed stronger performance and clear rotation. In the short term, there may be a technical rebound, but Morgan Stanley leans towards "selling on the rebound" for the reasons that deleveraging/rebalancing chain may not be over, and retail funds continue to be weak before tax season, making it harder to absorb the next round of selling pressure; historical statistics also show that after such intense momentum one-day declines, stock prices have a high probability of declining in the next 1-2 months. Index volatility is relatively restrained, but individual sectors show severe volatility A notable feature of this decline is the "separation of index and internal sectors". Goldman Sachs pointed out that at one point during trading, almost three-quarters of stocks outperformed the S&P 500 index, indicating that the pain point was focused on a few crowded momentum trades (believing that the trend will continue, i.e. buying assets that are rising, selling assets that are falling). Goldman Sachs attributed this to the increase in volatility and the reversal from technical deviations, rather than a single fundamental "trigger". In his closing remarks, Morgan Stanley trader Bryson Williams pointed out that the day seemed more like a position rebalancing triggered by a VaR shock, with the selling mostly stemming from concentrated reductions in positions in stocks that had risen significantly at the beginning of the year, rather than asymmetric deleveraging across long and short positions. Momentum collapse: crowded assets undergo concentrated deleveraging, AI and high beta themes under pressure Morgan Stanley data shows that the long and short momentum index MSZZMOMO fell by about 7.7% in a single day, a level of extreme volatility of 4 standard deviations, with the majority of the drag coming from the long side. Momentum long MSQQUMOL fell by about 5.7%, while momentum short MSQQUMOS only rose by about 1.9%, showing a unilateral adjustment of "cutting long without cutting short". In terms of themes, selling pressure was highly concentrated in sectors that had led the market and had crowded positions: AI, national security, bitcoin mining stocks and other high beta assets became the core of the decline, while cyclical, chemical, and banking sectors outperformed relatively, forming a "anti-AI" rotation. Leveraged ETF rebalancing amplified volatility and...