Wall Street's artificial-intelligence rally is in the middle of a shakeout, and the question on many investors' minds is whether the selling has finally run its course. The Nasdaq-100, a basket of the largest non-financial companies on the Nasdaq exchange, is roughly 10% below its early-October high. Some analysts believe the pullback still has more work to do before a durable bottom forms.
To gauge whether the market has cleared out the excesses built up during the AI boom, investors are looking at a mix of positioning data, stock-to-stock correlation, options flows, and chart patterns. The picture is mixed: some measures show improvement, but others suggest the correction isn't finished.
Encouraging signs: less crowding, less panic
On the positive side, Deutsche Bank, a global investment bank, notes that investors have been trimming their technology exposure since late September. That suggests some of the crowding that had built up in AI-related stocks has already been unwound. When too many investors are piled into the same trade, a sudden rush for the exits can amplify losses. A reduction in that crowding can make the market less vulnerable to sharp, cascading declines.
Barclays, a UK-based bank, points to another encouraging signal: the correlation among the S&P 500's largest stocks remains low. In other words, last week's selloff didn't look like a broad “everything falls together” panic. When stocks move in lockstep, it often signals a market-wide stress event. Low correlation suggests the selling was more selective, which can be a sign of a healthier correction rather than a systemic problem.
What's still missing: a classic washout
But the options and technical signals aren't flashing the kind of capitulation that often marks a true bottom. Carrick Lane, an options research firm, reports that retail call buying in AI names cooled sharply last week. Call options give the buyer the right to purchase a stock at a set price in the future; heavy retail call buying is often a sign of speculative enthusiasm. When that enthusiasm fades, it removes a source of upward pressure on prices.
More tellingly, Carrick Lane's one-month put-call skew — a measure of how much more expensive downside protection (puts) is compared to upside bets (calls) — sits around the middle of its 13-year range. In a classic washout, investors typically rush to buy puts, driving the skew to extreme levels. The current mid-range reading suggests options markets haven't reached the kind of defensive extreme that often signals a bottom.
Fundstrat, a market research firm, also notes that the Nasdaq-100's recent bounce has struggled to break its downtrend. Strategist Mark Newton expects another couple of weeks of choppy trading rather than a clean V-shaped recovery. A V-shaped bottom — where prices plunge and then immediately rebound — is rare and usually requires a sudden shift in sentiment. The current pattern, with bounces failing to hold, points to more sideways or lower trading in the near term.
Why options mechanics matter
A lot of the recent stability in AI-linked stocks has come from market mechanics, not just fundamentals. When retail investors pile into call options, the dealers on the other side of those trades often buy shares to hedge their exposure. That buying can soften dips and provide a floor under prices. But if call buying fades, that extra bid can disappear — or even reverse as dealers trim their hedges. That can make market moves feel jumpier and more unpredictable.
With put-call skew sitting near “normal,” options markets don't look like they've reached the kind of extreme that often marks capitulation. That helps explain why traders are bracing for stop-start moves in QQQ, the Nasdaq-100 exchange-traded fund, rather than an obvious all-clear signal.
What it means for everyday investors
For ordinary investors, the takeaway is that the AI trade is going through a period of digestion. The technology sector has been the engine of the broader market's gains for much of the past year, so a pullback in AI names can feel unsettling. But corrections are a normal part of market cycles, and they often serve to reset expectations and reduce speculative excess.
That said, the current signals suggest the bottom may not be in yet. If you're a long-term investor, it's usually wise to avoid trying to time the market. Instead, focus on your overall asset allocation and whether it still matches your risk tolerance and time horizon. For those with a shorter-term outlook, the choppy conditions argue for patience rather than aggressive buying on dips.
Investors will likely keep a close eye on the same gauges that analysts are watching: whether retail call buying stabilizes, whether put-call skew moves to more defensive extremes, and whether the Nasdaq-100 can break above its recent downtrend. Until those signals align, the AI shakeout may have more room to run.
