Why cash is king as market volatility rises and AI stocks tumble

Market volatility is rising

During the last stage of a frantic bull market, trading speed is of the essence.

Why? Because prices can zoom up and down extremely quickly. A popular – and volatile – stock can spike 50% and then drop by a third in a blink of eye.

Take ARM Holdings (ARM). Following a set of outstanding results, its share prices peaked near $440 in June. Just a month later, the same software design company is down nearly 40% from its high (see below). As the adage goes, the market giveth, the market taketh.

No doubt we are in the latter phase of a cyclical bull (that started since 2022) and, coincidentally, we are also coming near the end of a long secular bull since 2009. Valuation is high (second highest in a century); US equities tower over the rest of the world; and speculative market activity is immense.

In this phase, many US stocks can double quickly. Some outperform, like computer hardware SanDisk (US:SNDK) which rose 8x this year. Buoyed by this rosy and heady sentiment, many buyers entered the market near the top; some with added leverage. Then, the trap is set.

Look at the US margin debt. The latest figure puts this debt at a staggering $1.4 trillion!

Peak euphoria means most optimistic projections are priced in. Upward momentum can reverse abruptly on a little hiccup in expectations.

Did you know that 1.2 million stock accounts in Korea faced a margin call this month after a rout in Samsung Electronics (KOR:005930) and SK Hynix (KOR:000660)?

Once short-term traders are forced to liquidate, the cycle can only reinforce downwards. Speculative capital (involuntarily) dump positions after a minor price drawdown. This often triggers another wave of liquidation – which kick prices lower – until all leveraged short-term capital are forced out of the market. A ‘doom loop’ wreck prices and sentiment.

Imagine what will happen when that mammoth $1.4 trillion of margin debt is forced to liquidate. Volatility will spike.

Volatility rising across the board – a snapshot of 7 US stocks

What I do notice is that the downward force is not confined to AI/Memory stocks. The breadth of the stocks rolling over is starting to widen and this suggests that the global macro outlook is turning increasingly jittery.

For example, the number of US stocks trading above their 200-day moving averages has remained stubbornly below 70%. If you looking at the breadth chart over time, the pattern of falling highs is obvious. Less stocks are powering the S&P 500 to new highs. A narrowing leadership always spell trouble for a bull market because more and more stocks are falling by the wayside.

Below, I highlight seven major stocks that are encountering strong selling pressure:

Tesla (TSLA) – prices gapped down recently after releasing some underwhelming earnings. The stock has been losing upward momentum for some time and this sudden lurch down will only increase dumping of the stock. Musk’s the other company – SpaceX (SPCX) – has also slumped by nearly 50% in recent weeks. This sudden loss of wealth over Musk’s companies will bring much discomfort to his shareholders, and raise the critical question whether the ‘meme’ stock bubble is over.

McDonalds (MCD) – the global consumer giant peaked out at the same time the Iranian conflict started. Prices are under constant selling pressure as investors are downbeat on McD’s profit margins (eg, due to rising cattle prices). This led to a break of multiple support levels. However, with major price support near $250-240 watch for a technical rebound from here. A better consumer pick may be Coca-Cola (KO), which is trading near its all-time high.

Uber Technologies (UBER) – is starting its second downwave from $100. The global ‘gig’ company has been underperforming the S&P for some time. No new price highs were established in over a year. If prices maintain the breakdown beneath $70, watch for an eventual drop to $50-60. Competitor Lyft (LYFT) is also under selling pressure and trades far beneath its 2021 highs.

Agnico Eagle Mines (AEM) – is one of the largest precious metals miners globally. Its market cap of $72 billion surpasses that of Barrick Gold (B). Trendwise, it appears the cyclical rally here is over. A top formation was created after prices slumped 40% from its Jan peak. A major reason for AEM’s decline was the pullback in gold prices, which dampened sentiment over gold miners.

Silver miners are not doing much better either. LSE-listed Fresnillo (FRES) almost halved from its Q1 peak as silver crashed from $120 to $55.

Unless gold and silver prices regain their bull composure, these miners will be under increasing constant selling pressure.

MP Materials (MP) – even speciality commodity metal stocks can’t escape from the selling pressure. Rare earth miner MP Materials, for example, has failed to surpass its 2025 peak this year. More worryingly, the stock plunged nearly 40% in the past month or so to close near its 52-week lows. This slump occurs despite China’s rare earth export control. Oversold, I would not rule out a technical rebound from $30-40. Still, its long-term trend rolling over.

Austrialia-listed Lynas (LYC) is also trading consistently lower.

Netflix (NFLX) – is one of the original components of FAANG and this didn’t stop its share price from tumbling. The online streaming entertainment giant lost almost 50% of its market value in a year. This is a big decline and investors will be asking if the long-term rally here is over. Long-term NFLX bulls will argue that the company has experienced deep drawdowns before (eg during 2022 when prices crashed from $70 to $18). But the company is bigger now and expectations are higher, especially after a monster 8x rally. Therefore, any earnings disappointment will be met with more brutal selloffs.

Microsoft (MSFT) – even a major multi-trillion tech company like Microsoft couldn’t escape from the market malaise. Prices did a ‘double peak’ last year and have been under persistent selling since. A booming AI failed to lift the spirits here largely because of the souring sentiment towards the mammoth AI infrastructure buildout.

These tech companies (esp MSFT, GOOG, META) have been issuing bonds, equities and drying up their entire free cash flow to build major AI factories. Torsten Slok from Apollo noted the falling cover ratio for these tech-AI bonds. This is a warning sign that investors are no longer enthusiastic about AI infrastructure spending.

Summary

This week I highlight the rise in market volatility in the AI equity sector. Many stocks rose steeply then abruptly reverse their gains.

This volatility is decimating many leveraged investors and traders, who are forced to cut positions as prices extend their corrective waves. More worryingly, many other blue-chip stocks are following the drop in AI stocks. It seems that investors are forced to cut other positions to reduce risk.

I highlight seven stocks from many industries (ranging from Tesla to consumer to gold miners to hyperscaler) to show this widening selling pressure.

How should investor protect themselves should volatility spike further?

Well, buying put options (on major indices) is one possibility. Buying the VIX index is another. Hedging one’s equity exposure with short positions could protect some downside risk. But none of these is a perfect. In a falling market, cash is king. Because it allows investors to pick the best bargains.