Institutional Investors Double Down on Short Positions as U.S. Stock Selloff Enters Second Day
Wall Street's big players aren't just watching the selloff—they're betting it gets worse.
The Short-Squeeze Playbook
Hedge funds and institutional money managers are piling into short positions, amplifying the downward pressure. They're not hedging—they're hunting. This isn't passive risk management; it's an aggressive wager that the correction has legs.
Liquidity Evaporates
Bid-ask spreads widen as market makers pull back. The usual buy-the-dip crowd? Nowhere to be found. Retail investors are left holding bags while the pros profit from the decline—a classic Wall Street two-step where the house always wins.
Digital Assets Await Their Moment
Meanwhile, crypto markets watch with detached interest. Traditional finance's self-cannibalization creates the perfect breeding ground for decentralized alternatives. When trust in centralized systems erodes, capital seeks new homes.
The irony? Institutions shorting their own ecosystem while preaching stability. Finance's circular logic never disappoints—destroy value in one market, then pivot to sell the solution elsewhere. Crypto's structural advantages look increasingly compelling as traditional markets reveal their fragility.
U.S. equities dip as institutional investors liquidate their long positions
Institutional investors are aggressively unloading US equities:
Hedge funds sold US single stocks at the fastest rate since October on Wednesday, posting their 2nd consecutive daily sale.
This was driven by short sales and, to a lesser extent, by liquidating long positions.… pic.twitter.com/J4bG4Vtell
— The Kobeissi Letter (@KobeissiLetter) February 6, 2026
Kobeissi Letter credited that sell-off to short sales and liquidation of long positions. The analysis firm reported that the sell-off marked the 5th day of net outflows in the last six days.
5 out of 11 sectors, including Information Technology, Industrials, and Materials, experienced heavy liquidations, with Semiconductor and Semiconductor Equipment, Communications Equipment, and Tech Hardware facing the heaviest hits.
Kobeissi added that the behavior shows sentiment among hedge funds and other large players is shifting and has been the “theme” for some time. The firm noted that hedge funds and institutional clients are the largest net sellers, followed by private investors.
Major market participants sold heavily last week. According to Google Finance, the S&P 500 is down 1.19% over the last 5 days, while the Dow Jones Industrial Average is up 1.29%.
A previous Cryptopolitan report noted that Trump’s second term has posted the weakest stock market performance in two decades. During Trump’s first year as president, U.S. equities delivered significant gains despite falling short when compared to how the stock market performed during the first year of his recent predecessors.
Data from CFRA Research showed that market indexes ROSE by only 13.3% between Inauguration Day and January 20, 2026. Trump’s tariffs hit the markets hard by fueling uncertainty from the repeated changes in import and export rates as various countries tried to negotiate.
Although TRUMP claims he expects the U.S. stock market to double from its current record levels, which he takes credit for, his “America First” agenda is challenging investor confidence in U.S. assets. His trade policies, geopolitical tensions, and fiscal uncertainty have cooled the stock market, with several non-US markets and sectors outperforming U.S. equities over the past year.
Market players say the shift is due to the need to diversify, and that has made commodities, emerging markets, and UK investment trusts briefly gain momentum as direct beneficiaries of capital flowing outside the U.S.
Annabel Brodie-Smith, communications director at the Association of Investment Companies, said investors were diverting risk across SAFE havens and growth assets. She noted that strong earnings growth and AI-related spending continued to support U.S. equities while European markets had their best year since 2021 as investors sought better value.
AI spending on Big Tech rekindles earlier concerns of an AI bubble
Cryptopolitan recently hinted that AI spending by big tech could revive old fears of an AI bubble. The report noted that large tech firms plan to spend $660 billion on AI this year. The estimated figure triggered a $900 billion market selloff, as investors remain wary of AI valuations.
Wall Street dumped the shares of Amazon, Google, Microsoft, and Meta after the announcement, which continued the sell-off from last week following the companies’ earnings.
Amazon and Microsoft were hit hardest. The e-commerce giant took an 11% hit after announcing this year’s capex will reach $200 billion, beyond the $150 billion that analysts anticipated. Microsoft plunged 18% after announcing that quarterly spending on AI data centers surged 66%.
Investors dumped the tech stock despite the company recording that its cloud revenue grew 26% to $51.5 billion.
Apple performed better than other tech companies after announcing a 17% reduction in capex to $2.4 billion in Q4, bringing its total for the year to $12 billion. The company saw its stock rise by 7.5% after reporting a revenue of $144 billion in the last quarter of 2025.
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