What's Behind the Latest Sell-Off in Stocks and Bitcoin?

Recently, the U.S. market has been turbulent, with significant drops happening in the stock market and Bitcoin, so what's actually behind this wave of sell-offs?

Last week, prominent investors like Steve cohen and Warren Buffett issued warnings toward the market. Cohen expressed a negative outlook on the U.S. economy and predicted a significant correction in the stock market. Notably, this is his first bearish stance since Trump implemented aggressive trade policies.

Similarly, Buffett's berkshire hathaway has been selling stocks for nine consecutive quarters, with cash reserves reaching a record $3342 billion, an all-time high. Buffett warned in his shareholder letter that fiscal folly could destroy currencies.

The pessimistic forecasts from these investment giants have undoubtedly sounded the alarm for the market. Subsequently, U.S. stocks have continued to fall, Bitcoin has plummeted, and panic has spread across the market.

The warnings from these leaders are not without basis, as the market has reacted violently. The S&P 500 and Nasdaq have both experienced four consecutive days of declines, with the Nasdaq dropping about 5% during this period. Popular themes such as long-term growth, AI stocks, and election stocks have been under continuous pressure.

The Magnificent Seven have lost $1.5 trillion in market cap this year, with a drop of over $900 billion in the past week. Meanwhile, the cryptocurrency market has not been spared. Bitcoin prices fell 6% to $88,245 on Tuesday, the lowest since November last year.

More worryingly, even a rate cut (the U.S. 10-year Treasury yield fell to about 4.29%) has not provided any relief for stocks and long-term bonds. Peter Callahan, a top TMT trader at Goldman Sachs, described Wednesday as another uncomfortable day.

The VIX, or fear index, has risen back to its year-to-date high, with the market moving from record highs to extreme fear in just five days.

The recent sell-off in stocks, cryptocurrencies, and most risk assets can be attributed to several main reasons.

First is the retreat of retail investors. The shift in Trump's policy focus has accelerated capital withdrawal. Matt Reiner, chief cash trader at J.P. Morgan, suggested that bank stocks, cryptocurrencies, and other assets considered retail investment targets surged after the election due to expectations of deregulation. However, as the Trump administration focuses on immigration, tariffs, and DOGE, this excitement is rapidly fading, leading to a significant withdrawal of retail funds.

Among them, momentum stocks have been hit hard. Goldman Sachs data shows that Fins MOMO (financial momentum stocks) have fallen 9% in the past few trading sessions. TMT MOMO (technology, media, and telecom momentum stocks) have fallen about 19% from their 52-week highs, close to the 15-20% pullback levels seen in the past two years. Momo refers to the momentum investment strategy, which involves chasing stocks that have performed strongly recently.

Meme stocks (GSXUMEME INDEX) have also fallen for five consecutive days.

Further, while retail investors seem to be at the center of the recent crisis, hedge funds are also showing signs of capitulation, forced to reduce positions due to losses in peripheral investments.

Chloe Garber, an analyst at Goldman Sachs, also pointed out that recent hedge fund position reductions have exacerbated a negative feedback loop.

Additionally, CTA's (Commodity Trading Advisor) short-term momentum is negative, and there is a significant supply of U.S. stocks that need to be sold by the end of this week. If medium-term momentum turns negative, the supply could grow to over $20 billion.

Further, Nvidia (NVDA) is set to release its earnings report this week, but holdings in ultra-large-cap growth stocks and tech stocks remain at very high levels (97th percentile), far above what earnings growth implies. Any earnings miss could trigger further sell-offs.

Currently, the market is looking for incremental buyers. With both CTAs and L/S (hedge funds) selling, the question is when and where confidence and support will reappear in the market. Reiner believes that Wednesday was certainly not the most painful day, and the adjustment may only be one-third to halfway through, with more room to go, making it hard to say the market has bottomed out.