In Unprecedented Reversal, Nasdaq Shorts Hit Second Highest Ever

On Friday, September 25, we pointed out that one week after one of the biggest inflows into stock funds on record - when retail traders furiously "BTFD" in hopes the market's upward momentum would accelerate - speculators hit a brick wall and reversed furiously as stocks slumped.

This was amid US equity funds and ETFs reporting $26.87 billion of outflows, the largest weekly outflow since December 2018 and the third largest outflow ever. In other words, this was the fastest and biggest sentiment reversal on record.

This record sentiment reversal was driven by despair-driven capitulation outflows from high beta and momentum names, as tech-focused ETFs suffered $1.23 billion worth of outflows, the largest since December 2018, when global stock markets tanked. September was also the first month of outflows for the tech sector since the March crash.

But nowhere has the sentiment shift been as clear as in Nasdaq 100 Mini futures, where after more than a year of bullish sentiment with just one tiny dip into bearish territory in May, speculators finally heaved, sending the net non-commercial NQ futs to -134,311 contracts.

This surpassed the peak bearish sentiment during and after the financial crisis, and was the second highest on record, with just July of 2006 being more bearish.

What happened back then? For the next generation of traders out there, that's when Fed had just reached the peak of its rate-hike cycle (yes, there was a time when rates above 2% were possible), hammering the Nasdaq.

Back in 2006, the Fed responded by starting an easing cycle in 2007, and the resulting drop in rates from over 5% to 0% eventually allowed the Nasdaq to rebound and hit all time highs.

What is curious is that it took only a modest Nasdaq correction over the past month to send sentiment to the second most bearish on record. And unlike 2006, this time the Fed can't cut rates any lower to reverse sentiment.

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