Investment Review №356. A Reassessment of Values

In the week ending October 16, the Nasdaq-100 fell 5.5%, with semiconductors suffering one of the year’s sharpest drawdowns. While major banks reported record selling of Technology stocks by institutional investors, retail investors were buying. Even before the October decline, individuals had been adding to positions: EPFR data show technology funds took in $16.2 billion in the week ending October 14, the largest inflow of any sector. During the selloff itself, speculative buying persisted, with retail investors purchasing nearly $7 billion of the triple‑leveraged Direxion Daily Semiconductor Bull 3X ETF (SOXL).

Institutional investors unwound long positions at 4.7x the rate at which they opened new shorts. Net equity exposure among U.S. hedge funds fell to 43.7%, a five-year low. This suggests funds are being forced to reduce risk by loss limits, volatility constraints and client mandates, even when the underlying assets retain attractive prospects. Retail investors are generally less constrained and have used that flexibility to buy the dip, signaling confidence in a rebound.

That conviction has paid off before. During the pandemic-driven selloff in 2020, retail investors held their ground and benefited from the subsequent recovery. After the tariff shock in spring 2025, a similar pattern emerged: institutional investors withdrew amid extreme uncertainty, while retail investors bought the dip. This doesn’t prove retail is systematically smarter than funds, but it does highlight their advantage during forced liquidations. Moreover, funds that have reduced exposure to their lowest levels in five years could re-enter as buyers as the market stabilizes, a development that could provide further support for the positions retail investors have accumulated.

This time, optimism also rests on fundamentals. TSMC raised its 2026 revenue growth outlook to 44% and guided for Q4 revenue of $52.3–54.3 billion. Demand for leading-edge semiconductor manufacturing remains strong, while the Nasdaq-100's forward P/E has compressed to roughly 21x. Upcoming earnings should help separate market fears from underlying order trends.

Another correction remains possible, but the recent pullback may have reduced the downside risk. A combination of solid earnings, active retail buying, and sharply reduced hedge‑fund exposure increases the probability of a new rally, led by semiconductors, whose advantages I’ve emphasized in recent months. Investors who bought index puts as a hedge following my earlier recommendations may consider taking partial profits as a conservative approach or closing those hedges entirely for a more aggressive stance. If the market recovers, I would favor the unleveraged VanEck Semiconductor ETF (SMH) over SOXL. Even a sound investment thesis can result in losses when leverage is involved, particularly with 3x products. Against this backdrop, retail investors have a genuine opportunity to outperform Wall Street professionals.