Who Will End the AI Bull Market: Positions or Narratives?
TechFlow Selected TechFlow Selected
Who Will End the AI Bull Market: Positions or Narratives?
Nomura warns that a “DeepSeek-style” shock could trigger a circuit breaker on the Nasdaq, with semiconductor ETFs potentially falling 15% in a single day.
Navigating Web3 tides with focused insightsBy Long Yue
Source: WallStreetCN
The more sharply the market rises, the harder it becomes to identify reasons for a pullback—yet the risks haven’t vanished; they’ve simply gone deeper.
On May 14, Bloomberg market analyst Jon-Patrick Barnert wrote that the current U.S. equity rally has clearly accelerated, yet timing and cost considerations for shorting remain highly challenging. Even more troubling is the growing ambiguity around the question: “What is the most compelling reason to short right now?”
The core tension driving this rally is this: positions have become extremely crowded, while fundamental narratives—especially AI—continue to buoy market sentiment. Between these two forces, which will break first?
Positions: The Market Is Approaching “Fully Long”
From a purely technical price perspective, correction signals are already quite evident.
The S&P 500’s six-week consecutive rally ranks among the longest in over 70 years—and also counts among the strongest rallies on record. Barnert notes that “taking a breather” would be entirely normal for this market.
Goldman Sachs’ Risk Appetite Indicator has rebounded to 1—the first time since the start of the year. Readings above 1 are exceedingly rare historically and often foreshadow potential corrections. The last time this threshold was breached was in 2021, shortly before the market entered a bear phase.
Looking at the hottest thematic stocks, Barnert describes the market as one where “everything is overbought,” with some of the most popular sectors reaching extreme overbought levels. Compounding this is mechanical inflows—currently appearing at or near maximum long positioning—painting an overall picture of limited upside and substantial pressure for position resets.
Yet shorting remains difficult. Barnert points out that position adjustments could occur within a single day, making timing entries and exits for short trades exceptionally tricky. If the market opts for a “slow decline,” volatility-based positions would quietly decay amid muted conditions. A more likely scenario is that overall sentiment stays bullish; once short sellers are forced to cover, it could instead trigger a fresh short squeeze—sending prices higher, and faster, than anyone anticipated.
Subtle shifts are already emerging in fund flows for some popular ETFs—shifting toward “locking in gains” rather than “chasing highs.” Still, Barnert candidly admits this trend has persisted for several weeks and has yet to exert any tangible impact on broader market direction.
Narrative: Without AI, the Broad Market Is Nothing
If positioning represents a technical vulnerability, the narrative layer currently appears comparatively solid.
Barnert notes there is no clear signal triggering a fundamental bear market. Corporate earnings remain robust; inflation expectations have edged up slightly but remain far from extreme levels. Markets have already priced in elevated oil prices and Middle East tensions, while the latest U.S. jobs data has eased recession concerns. As for rate-hike expectations, they’ve long ceased to act as a drag on equities.
But one issue demands attention: the concentration of this rally has itself become extraordinarily concentrated.
Barnert observes that whether comparing index performance with and without AI exposure—or breaking down the sources of gains since March—the conclusion points unambiguously in one direction: without AI, the market’s performance would be merely “mediocre.” More notably, the semiconductor sector alone accounted for nearly 40% of the gains since March.
The AI-driven market narrative has re-entered a “greed mode,” rather than a rational pursuit of reasonable returns. Concerns widely debated just months ago—whether AI compute costs can be offset by workforce reductions, bottlenecks in data center energy supply, AI pricing wars eroding margins, new entrants disrupting incumbents at lower cost, surging capital expenditures alongside stagnant share buybacks, and AI security risks—now appear collectively forgotten by the market.
Risk of a Repeat “DeepSeek Moment”
Nomura strategist Charlie McElligott issued the most direct warning on this point.
He stated: “Given the current market structure and high thematic overlap, if another broad-based ‘DeepSeek-style’ catalyst emerges unexpectedly, it could very well trigger Nasdaq-level circuit-breaker trading (limit-down).”
McElligott further noted that under such a scenario, semiconductor ETFs could easily drop 15% in a single day—“as the reversal of assumed reflexive mechanical flows would generate massive overshoot-style declines.”
In other words, those very mechanical flows—such as CTA strategies and risk-parity funds—that kept piling into the rally could, once reversed, become powerful accelerants of the downturn.
The two key risks facing this AI bull market are technical (overcrowded positioning) and narrative-based (sustainability of the AI story). The former could trigger at any moment; the latter, if broken, would deliver a deeper shock. Their convergence creates the most structurally fragile condition warranting close vigilance in today’s market.
Join TechFlow official community to stay tuned
Telegram:https://t.me/TechFlowDaily
X (Twitter):https://x.com/TechFlowPost
X (Twitter) EN:https://x.com/BlockFlow_News
