Nasdaq plunges into technical correction! Retail and institutional investors both flee, short-term volatility may further intensify.

Title context: Nasdaq plunges into technical correction! Retail and institutional investors both flee, short-term volatility may further intensify. Text: The political shockwave from the Democratic Party's sweep of both chambers of the U.S. Congress in the midterm elections has detonated in the U.S. stock market with a delay. As the market worries that the new legislative majority will tighten regulation of artificial intelligence (AI)-related spending and data center construction, tech stocks suffered a "bloodbath" on Thursday, the AI hardware supply chain saw collective selling, and the Nasdaq Composite Index plunged sharply as a result, with its closing price more than 11% below the all-time high set last month, entering technical correction territory. The core narrative of Thursday's selloff was the market's repricing of the AI capital expenditure cycle. Michael O'Rourke, chief market strategist at JonesTrading, said bluntly: "Data center construction will see a substantial slowdown due to the political landscape, and the earnings expectations that supported the previous bullish thesis have become invalid. Investors simply do not know where these expectations will reset, so before they gain new clarity, they can only continue to reduce risk exposureand this process will not end quickly." The market worries that Democrats may push four types of AI tightening policies: restricting data center expansion, with Democratic lawmaker Sanders proposing the extreme idea of pausing AI data center construction; requiring data centers to bear the full cost of grid connection; imposing taxes on data centers and AI services; and retaining state-level regulatory authority and strengthening investigations. If relevant measures are implemented, they could push up AI investment costs and lengthen construction cycles. Some economists said that with Democrats taking both chambers, pressure for AI regulation rises, and Democrats will gain more authority over investigations, appropriations and personnel appointment reviews, but most ordinary bills still need 60 votes in the Senate and face the constraint of presidential veto power. The market may view the sweep as a precursor to a party change in 2028 and price in the risks of tax increases and tighter AI regulation in advance. Retail and institutional investors both flee According to Vanda Research data, retail investors abandoned their signature buy-the-dip strategy on Thursday and instead sold individual stocks, at the fastest pace since the most severe period of the market crash triggered by the COVID-19 pandemic in March 2020. Vanda Research noted that retail selling in the first 30 minutes after Thursday's open set the largest single 30-minute sell record in recent months, close to the peak during the retail panic exit in late July 2024. The firm added that shortly before the close, net retail outflows from individual stocks reached US$338 million. The selloff marked the third-largest single-day retail liquidation of individual stocks on record, after March 12 and March 17, 2020. As retail investors retreated, institutional investors were also broadly reducing risk exposure, and systemic selling pressure continued to intensify. Vanda analyst Viraj Patel noted that earlier this week, institutional investors' call option buying intensity had fallen to the lowest level in a year. At the same time, leveraged exchange-traded funds (ETFs) faced pressure to rebalance before the close, with an estimated scale of US$42 billion to US$48 billion. In addition, volatility-targeting funds were also reducing risk exposure in tandem. Viraj Patel warned that institutional buyers chose to step back just as retail investors and systematic strategies were aggressively selling stocks, a capital flow pattern that is extremely rare and seldom appears unless the market is under severe stress. It is understood that after the U.S. market opened on Thursday, a large number of sell orders poured into the futures market almost simultaneously. Several veteran traders described the liquidity condition at the time as "highly characteristic of liquidation," and noted that programmatic selling by algorithms and CTA funds exacerbated the initial straight-line plunge with no buyers. UBS noted that retail-led selling triggered the futures market's risk control systems and forced liquidation of leveraged ETFs. UBS further warned that systemic funds (especially risk-control funds) are expected to still sell more than US$100 billion on Friday, and this round of adjustment may not yet have bottomed. What happens next? However, historical data show that selling may intensify further in the short term, but the market usually ultimately recovers after three months. CappThesis founder Frank Cappelleri used past U.S. midterm election cycles as a reference and found that historical experience similarly shows the market may face more volatility in the short term. The chart analyst said that in 13 midterm election cycles since 1974, the Nasdaq rose 12 months after the election in all but one. He said: "It should be noted that this process may be accompanied by sharp volatility." Citing 2018 as an example, Frank Cappelleri pointed out that the day after Democrats won House seats that year, the Nasdaq rose. The market then experienced a sharp selloff in December, but ultimately the index was still up about 15% one year after the election. Looking back at 10 technical corrections over the past decade, after the selloffs in 2025, 2022, 2020 and 2018, the Nasdaq experienced further sharp declines in the following month. However, in all of the above cases except 2022, the Nasdaq re-entered an uptrend six months laterthe technical correction that occurred in January 2022 brought more severe results, with the Nasdaq falling a further 18.3% over the following six months and 24.3% after one year. Overall, measured from the bottom of technical corrections, the Nasdaq rose an average of 9.41% over the following three months and 17.03% over six months. Market analysts are divided on the subsequent trajectory. Wall Street analyst Dan Ives of Shenzhen Kaifa Technology believes chip stocks still have 10% to 12% downside, while Tom Lee, co-founder and head of research at Fundstrat, known as Wall Street's "oracle," characterized this round of AI selling as an "overreaction" and expects tech stocks to rebound 20% from current levels. Nomura cross-asset strategist Charlie McElligott pointed out that current market negative gamma positioning is "enormous," meaning price declines will continue to amplify the trend. Goldman Sachs' CTA model estimates that if the market falls further, the S&P 500 will face about US$164 billion in systemic selling pressure. BTIG chief technical strategist Jonathan Krinsky reminded that rotation needs buyers on both sides. Healthcare is already 19% above its 200-day moving average, the highest on record, and defensive buying is running out of steam, so he believes the next round of defensive buying lacks a funding source.