Santoli Says AI Trade Is Close to a Now-or-Never Rebound Test

According to the memo, the S&P 500 has moved sideways for months and last week dipped to levels it first reached on June 1. The index spent nearly all of the past three months inside the range it traveled during a two-day rally on Aug. 3-4. Former AI leaders tracked by the iShares AI Innovation ETF have fallen 35 percentage points relative to the equal-weight S&P 500, regained half of that loss and then given up most of the bounce.

Within the market, the churn has created short-term washout conditions in semiconductors and other former momentum AI-hardware plays, Santoli wrote. Cyclical pockets, from consumer discretionary to industrials and banks, have suffered double-digit setbacks as higher bond yields and elevated oil prices restrain growth expectations. Equity investors have favored quality and defense, while debt markets have begun rationing growth capital more strictly, raising hurdle rates for more marginal AI-data-center borrowers.

Some intermarket relationships have also been scrambled, the memo said. Treasury yields have stopped moving closely with oil, retreating well off their highs as crude stays above $100 a barrel. The S&P 500's former inverse correlation with Treasury yields has loosened, with the bond-market bid appearing more tied to hiccups in the AI buildout that have stymied Big Tech.

Goldman Sachs' equity desk noted "trader exhaustion" over the weekend, according to the memo, partly because the momentum-factor stock basket has moved at least 5% in a day 30 times in 2026, more often than in any other full year, including crash years such as 2000, 2009 and 2020. "Not sure we can handle much more flipping of the thematic script(s)," the desk said, according to Santoli.

Macro Risk Advisors' John Kolovos said his sentiment and positioning composite is approaching a "fat pitch" for a tactical rebound, according to the memo. By most measures, hedge funds have sharply cut leverage and exposure to tech. Deutsche Bank said broad institutional positioning in tech is not far above Iran-war lows and that "the last two reversals higher in tech coincided with strong earnings releases."

The setup comes as megacap cloud platforms Alphabet, Amazon and Microsoft report results this week, Santoli wrote. He also said AI-funding anxiety should ease somewhat after Anthropic's IPO filing showed good operating metrics and $100 billion in cash before IPO proceeds are collected, alongside Blackstone's financing for SpaceX capital expenditure and Broadcom lining up $63 billion to fund chips for Anthropic.

One outlier remains retail traders' persistent buying of even the worst-looking tech charts, according to the memo. Scott Rubner, head of equity and equity derivatives strategy at Citadel Securities, wrote on Friday after Thursday's 3% tech selloff that platform data showed the opposite of retail capitulation suggested by several sell-side banks. Citadel's retail order flow revealed extreme dip buying in leveraged semiconductor ETFs, Micron, Meta and other hard-hit names. Robinhood data cited by Sherwood Media showed traders rushed into Bloom Energy on Friday as it fell 11%, with the second-highest day ever of net buying in the stock.

Santoli wrote that such aggressive buying of severe weakness has not typically coincided with important market lows. Citadel data, he said, show that the late-March and late-July bottoms occurred when retail traders panicked out and were net sellers for a week or two. He said retail's stubborn dip-buying does not preclude relief in hard-hit parts of the market, but it likely limits how strong or durable a rally might become.

Kolovos added: "Sentiment and breadth are finally giving us something to like, and a fat pitch may be approaching, but the macro needs to cooperate. Our studies show that improving momentum amid tight financial conditions has historically produced disappointing returns and left the market dangerously vulnerable to left-tail outcomes or market corrections."