UBS: After a historic sell-off, now is the time to gradually build positions in "momentum stocks."

``` UBS believes the sharp sell-off in momentum stocks may be nearing its end and suggests investors gradually rebuild positions in AI and semiconductor stocks. According to UBS prime brokerage data, hedge funds have trimmed their long positions in momentum and semiconductor stocks by about 5% of total market value, marking one of the largest reductions on record. Net holdings in semiconductor and software stocks have returned to April levels. Michael Romano, UBS Head of Hedge Fund Equity Derivatives Sales, wrote in a client note that AI fundamentals continue to improve, which signals a buying opportunity on dips. However, he also recommends investors build positions in stages, rather than re-enter the market all at once. Romano wrote:

Reducing exposure to momentum stocks has been, and remains, a strategy we firmly favor. In this market, building positions in batches is the prudent approach.

It is worth noting that a rebound in AI and momentum stocks could come at the expense of recent strong-performing sectors. UBS prime brokerage data shows that recent buying in banks, industrials, and other cyclical stocks has mainly come from short covering rather than new long positions. Once funds rotate back to AI-related targets, these sectors may face pullback pressure.

Position Rotation Supports Rebound, Software Stocks Lead the Charge

Romano pointed out that the current positioning structure is increasingly favorable for a rebound in momentum stocks. He also expects that this wave of momentum stock selling will bottom out by the end of July, or may have already hit bottom. A key signal supporting this view came from the dramatic intraday move last Friday, when the UBS momentum indicator reversed sharply from down 3.5% to up 2.5% in just two hours. Romano wrote:

I believe that once the situation turns, the market will see a liquidity-driven surge.

The UBS momentum stock basket includes stocks such as SanDisk, Broadcom, Oracle, Datadog, and Microsoft. Meanwhile, the UBS software stock basket has risen about 20% since the end of June. Romano believes this highlights that these stocks remain highly sensitive to position changes. Risk Warning and Disclaimer Markets carry risk, and investments should be made cautiously. This article does not constitute personal investment advice and does not consider individual users’ specific investment objectives, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article fit their circumstances. You are solely responsible for any investment decisions made based on this article. ```