This week was a scare for the U.S. stock market, with the Nasdaq experiencing its largest three-week decline since April, as Wall Street braces for more turbulence

Concerns about the AI bubble bursting, expectations of economic slowdown, and profit-taking pressures are intertwining in the market, leading to the most severe intraday volatility in U.S. stocks in months this week.

The S&P 500 index fell nearly 2% this week, and despite a rebound on Friday, the cumulative decline since November has reached 3.5%. The tech-heavy NASDAQ Composite Index has dropped over 6% in November, marking the largest three-week decline since April.

(U.S. stock benchmark index performance this week)

Momentum stocks suffered a severe blow this week, with Robinhood's market value evaporating by about a quarter this month, Coinbase's stock plummeting 30%, and Palantir falling about 23%. Goldman Sachs' basket of high-beta momentum stocks plunged nearly 15% from yesterday's peak. This marks the worst week for momentum performance since November 2022.

(Goldman Sachs high-beta portfolio plummeted 14.7% from yesterday's peak)

Investors heavily betting on AI companies are the most anxious. The Global X Artificial Intelligence & Technology ETF, which tracks AI stocks, has fallen about 10% this month, while the ETF tracking the seven tech giants has dropped about 6.6% since the end of October.

Unexpected Sell-off Triggered by NVIDIA's Earnings

After the U.S. stock market closed on Wednesday, almost all Wall Street analysts expected NVIDIA's strong earnings report to drive the market higher. This indeed started off well but then took a sharp turn.

Wall Street Journal mentioned that NVIDIA's earnings report and comments were positive from any angle. However, as Goldman Sachs' top trader Ryan Sharkey pointed out: the lack of corresponding returns for genuinely good news is often a bad sign.

On Thursday, NVIDIA opened with a surge of 5% to $196 but then plummeted significantly, closing down nearly 3% at $180.98, with an intraday decline of 7%, marking the lowest closing price since October 22. This sharp reversal directly dragged the S&P 500 index down by about 3%.

Volatility trader and founder of Kairos Investment Advisors, Ramon Verastegui, said:

People are really scared. The honest answer from everyone I spoke to is that no one expected this.

He traded options until midnight, trying to profit from the chaos, taking only a brief break to play a game of paddle tennis while keeping an eye on his phone.

Analysis points out that NVIDIA CEO Jensen Huang's attempt to dispel concerns about the AI bubble is reminiscent of comments made by Cisco Systems' head John Chambers during the internet bubble era. In August of that year, after Cisco reported revenue and profit growth of over 60%, Chambers declared that "the second industrial revolution has just begun." A year later, the stock fell by 67%.

From Private Credit to Crypto Assets

In the past, stock market investors rarely paid attention to the private credit market, but that has changed.

From Sam Altman's OpenAI to various credit markets, the influence of the private market is increasing day by day. The sudden collapse of automotive parts group First Brands has raised concerns about the loose credit environment in these areas.

Orlando Gemes, Chief Investment Officer of London hedge fund Fourier, pointed out:

Some companies borrowed up to seven times their cash flow at interest rates of 2%-3%, but they now face the dilemma of refinancing at rates of 8%-10%.

The ongoing losses in cryptocurrency are also putting pressure on investors. On Friday, the price of Bitcoin briefly fell to $80,553, and although it rebounded towards the end of the New York session, it is still down over 30% from the historical high of $126,000 set in early October.

(Bitcoin rebounded to around $84,000 towards the end of the New York session)

In the past, the collapse of the crypto market had little impact on the stock market or the overall economy, but today, with more people holding crypto assets and a larger market scale, its potential widespread impact raises new questions.

Traders say that throughout the week, the price of Bitcoin has become a key indicator for judging the next direction of the market.

Wall Street Journal mentioned that hedge fund manager Bill Ackman stated he underestimated the connection between cryptocurrencies and the stocks of companies like Fannie Mae and Freddie Mac, noting that forced liquidations and margin calls in the crypto market are triggering sell-offs of these stocks.

High Leverage and Year-End Profit-Taking Amplify Market Volatility

Traders attribute the extreme volatility to leverage and the impulse for profit-taking before year-end.

According to data from the Financial Industry Regulatory Authority, as of the end of October, the financing scale of brokerage accounts reached a historic high of $1.1 trillion. Data from Morningstar shows that leveraged stock fund assets soared to over $140 billion this fall, the highest level recorded since the 1990s.

Benn Eifert, managing partner at San Francisco investment firm QVR Advisors, stated:

There is a group of over-leveraged market participants who are long both cryptocurrencies and bubble tech stocks. When they are forced to liquidate their crypto positions, they sell tech stocks.

Human nature may also exacerbate volatility. Investors still hold substantial profits this year.

The S&P 500 index is still up 12% this year, while bonds are enjoying their best year since 2020. Hedge fund traders are worried that year-end rebounds could let huge bonuses slip through their fingers If the market weakens at this time every year, they often rush to sell stocks.

Nevertheless, some believe that the volatility remains relatively mild.

Matthew Tym, head of equity derivatives trading at Cantor Fitzgerald, stated that his clients do not seem particularly panicked. Investors with a broader market focus rather than concentrated bets on artificial intelligence or cryptocurrencies are performing well. Tym said:

The S&P 500 Index is only 4.2% below its all-time high, and most people are still waiting and watching