On Thursday, ai became a hot topic. $NVIDIA (NVDA.US)$The fluctuation range from high to low of the stock price was about 7%, and finally fell 3.5% that day, becoming a hot topic on Wall Street. Futures trading on Friday showed that investors remained cautious on the new trading day.

Does this reversal indicate that NVIDIA, which was once the world's most valuable company and drove up the stock prices of many AI companies, has ended its frenzy? Or is this only a short-term profit-taking of a stock, as the momentum indicator shows that the stock is in overbought territory?

Time will tell us the answer. But from the impact of NVIDIA's 180-degree turn on many large-cap tech stocks on Thursday, this volatility indicates that a market that has soared to record highs may become increasingly sensitive to a shake-up of supportive comments or unexpected bad news.

A team led by JPMorgan analyst Nikolaos Panigirtzoglou believes that one of the reasons for this potential vulnerability is that the short interest of the two largest US stock ETFs is at a historical low.

They said in a report released on Thursday: "One of the supports for US stocks in the past year comes from the short interest decline of the two largest stock ETFs- etf and etf." Simple short interest can benefit from selling assets and buying back at lower prices, and can also be used to hedge long-term bets.$SPDR S&P 500 ETF (SPY.US)$ and $Invesco QQQ Trust (QQQ.US)$As shown in the following figure, in the equally weighted index composed of the seven giants of the US stock market and nvidia, the proportion of short interest in the float shares has not risen significantly. A similar trend can also be seen in the equally weighted s&p 500 index.

As SPY and QQQ are one of the main tools for investors to bet on stocks at the index level, the decrease in short interest supports the index as the short positions are gradually covered.

Now, the decrease in short interest in SPY and QQQ may mean that investors are turning to increase their holdings of individual stocks. However, JPMorgan said the data does not support this view.

As shown in the following figure, the short interest holdings have not risen significantly as a percentage of floating shares in the equally weighted index composed of the seven US giant stocks.$Alphabet-A (GOOGL.US)$N/A.$Apple (AAPL.US)$, $Amazon (AMZN.US)$and$Meta Platforms (META.US)$, $Microsoft (MSFT.US)$In the equally weighted s&p 500 index, a similar trend can be observed.

So why has short interest been declining? JPMorgan lists three reasons: 1. It is difficult to maintain short positions in a rapidly rising market; 2. Regulatory agencies require increased transparency, which means that short positions are more easily squeezed by others; 3. What happened during the meme stock frenzy in 2021 has discouraged some shorts.

In fact, according to data from hedge fund research company (Hedge Fund Research), assets under management of hedge funds that lean towards shorting stocks have been declining sharply in recent years.

As short interest declines, the proportion of stocks held by global non-bank investors in their portfolios has also reached the highest level since the financial crisis.

JPMorgan said: 'The stabilized funding support brought by gradually covering short positions provides additional space for investors targeting volatility or risk management frameworks based on volatility to nominally hold larger stock positions.

The JPMorgan team said that essentially, the decline in short interest in SPY and QQQ has become a bet on maintaining low volatility.

"Given that short interest is currently at a low level and has lasted for a considerable period of time by historical standards, this implicit bet on shorting volatility seems to have persisted for quite some time. However, if negative news begins to reverse the trend of declining short interest over the past year, the fragility of the US stock market will be exposed."

Edited by Jeffrey