According to UBS Group AG, the intense selling of momentum stocks may be nearing its end, and the bank advises investors to start gradually rebuilding positions in artificial intelligence and semiconductor equities.

Data from UBS Group AG's prime brokerage indicates that hedge funds have reduced their long positions in momentum and semiconductor stocks by approximately 5% of total market value. This represents one of the largest recorded reductions, bringing net exposure in semiconductor and software stocks back to levels seen in April.

Michael Romano, Head of Hedge Fund Equity Derivative Sales at UBS Group AG, noted in a client report that continuously improving AI fundamentals present a signal to buy on dips. However, he also recommended that investors build positions in stages rather than re-entering the market all at once.

Romano stated that reducing risk exposure to momentum stocks has been and remains a strongly favored strategy. He emphasized that a phased approach to building positions is the prudent course of action under current market conditions.

It is worth noting that a potential recovery in AI and momentum stocks may come at the expense of recently strong sectors.

Prime brokerage data from UBS Group AG shows that recent buying in bank, industrial, and other cyclical stocks has primarily stemmed from short covering rather than new long positions. Should funds rotate back into AI-related assets, these sectors could face downward pressure.

Positioning Shifts Support a Rebound, with Software Stocks Leading the Way

Romano pointed out that the current positioning structure is increasingly tilting in favor of a rebound for momentum stocks. He further anticipates that the ongoing sell-off in these stocks will bottom out by the end of July, and may have already done so.

A key signal supporting this view came from a dramatic intraday reversal last Friday, where the UBS Group AG momentum indicator swung from a 3.5% decline to a 2.5% gain within just two hours. Romano commented that once a reversal occurs, the market could experience a significant liquidity-driven rally.

The UBS Group AG momentum stock basket includes companies such as SanDisk, Broadcom, Oracle, Datadog, and Microsoft.

Concurrently, the UBS Group AG software stock basket has risen about 20% since late June. Romano views this as highlighting the continued high sensitivity of such stocks to shifts in positioning.