Red Alert For AI Bulls
The AI trade has become one of the most one-sided markets in recent memory. Every dip has been bought, volatility has been crushed, and bears have been systematically punished. That backdrop is finally being challenged.
Breaking down?NDX is now testing the steep trend line that has defined the rally from the recent lows. A close at these levels, or lower, would suggest momentum is finally starting to fade. The first support to watch is the rising 21-day moving average near 29,750. Below that, the next key levels come in around 29,600 and 28,800.
NDX is down roughly 2.5% from the all-time highs reached just three sessions ago. The mid-May pullback was slightly larger, but the current move already ranks as the second-biggest setback since the squeeze began.
One key difference is volatility. The mid-May pullback occurred alongside falling vol, a sign that investors remained relatively relaxed. This time, we are watching volatility very closely. If vol starts moving materially higher as prices fall, it could be an early clue that this correction has more downside potential.
For months, the AI rally has been driven by a small handful of mega-cap winners, allowing index-level risks to remain suppressed. The recent bounce in COR3M suggests the market may be starting to trade more as an index and less as a collection of AI stars. If that trend continues, weakness in the generals could finally start mattering again.
We have been running the 1997 analogy for several weeks. A pullback in the NDX would not break that framework. If anything, a period of consolidation here would make the analogy look even more perfect.
We outlined our hedge logic a few days ago:
Instead of getting stopped out, hedging downside risks via put spreads makes sense in our view. Chart shows the scenario analysis for the QQQ July 730/690 put spread. Nothing too "fancy", but offers around 4.5x.
Every pullback since April has been a buying opportunity. Bulls do not need to prove they can make new highs. They have already done that repeatedly. The burden is now shifting to bears. If volatility continues rising, correlations continue firming, and NDX loses the 21DMA, the market could be experiencing its first genuine character change in months.
