U.S. Stock Selloff Recap: Retail Investors Sell First, Hedge Funds and Institutions Follow, Mechanical Deleveraging Amplifies Decline

BlockBeats news, November 7 - According to Bloomberg, Wall Street's reaction to the U.S. midterm elections turned from positive to negative within about 24 hours. Thursday's sell-off spread from retail investors to hedge funds, long-only asset managers, and quantitative strategies, wiping out approximately $3.7 trillion in single-day market value for U.S. stocks, with the Nasdaq 100 Index recording its largest decline since March 2020.

Post-election stocks initially rose as event risk subsided and oil prices retreated, but investors subsequently reassessed the risk of Democratic scrutiny over data center expansion. In the first half hour after Thursday's open, retail investors were the first to sell for profit, followed by hedge funds and long-only institutions. Vanda Research data showed that same-day net retail selling of individual stocks was second only to two days during the March 2020 pandemic shock. Strategist Viraj Patel noted that while retail and systematic investors were actively selling, institutional buyers chose to step back—capital flows typically seen only during genuine periods of market stress.

The decline then triggered mechanical selling. Nomura strategist Charlie McElligott estimated that based on Thursday's intraday negative Gamma exposure, every 1% drop in stocks would generate approximately $7 billion in additional selling pressure from options market makers' hedging activity. Volatility control funds were estimated to need to reduce approximately $61 billion in equities based on market changes at the time, with about $25 billion in selling from Wednesday still being executed; leveraged ETF closing rebalancing was expected to bring an additional $47 billion in equity selling.

As major indices broke below key levels, trend-following strategies continued to reduce positions. Vanda estimated that commodity trading advisors (CTAs) sold approximately $13 billion in S&P 500 and Nasdaq futures, pushing exposure to near the lowest levels in the firm's data records. Goldman Sachs prime brokerage desk estimated that fundamental long-short funds lost approximately 1.3% on Thursday, while tech-themed funds fell over 4%, with year-to-date returns roughly wiped out.

By sector, baskets of memory, optical networking, data center, and AI semiconductor stocks fell 12% to 15% on the day; the S&P 500 excluding AI-related stocks also fell 2.3%. The memory and optical networking basket has lost about half its value from its June peak. The VIX index rose from 16.6 points at Thursday's open to nearly 28 points at the close.

On Friday, the market began to rebound, with chip stocks driving the S&P 500 higher and the Nasdaq 100 Index rising as much as 2.6% intraday, though whether the rally can be sustained remains uncertain. DataTrek Research co-founder Nick Colas believes investors had been overly optimistic and that Thursday's sell-off was an unpleasant but necessary step in resetting expectations; he remains bullish on U.S. large-cap stocks and expects the market to stabilize in the coming week.