Rotation To Explosion

Let's see, we are told that the AI bubble remains perfectly intact but now everyone will rotate out of over-valued AI stocks at the same time. That is Wall Street's 2026 prediction in a nutshell...

"As late 2025 draws to a close, a significant recalibration is underway in global financial markets, with investors increasingly rotating capital away from the once-dominant Big Tech and Artificial Intelligence (AI) sectors."

Sounds great, but who is going to buy the Big Tech stocks getting sold en masse?

The hyper-growth narrative that drove the AI trade into melt-up mode throughout 2025 is now coming into question. Almost daily, questions arise surrounding the totally ludicrous magnitude of capex, the debt financing of capex, and the non-existent revenue model supporting it all.

What implodes bubbles is not the termination of capital investment, it's when financial speculation reaches its apex accompanied by peak optimism. Like this:

"A flow of money into stocks and more equities participating in the bull market have triggered a sell signal that historically has led to big pullbacks, according to a new Bank of America report."

The signal was activated by significant inflows into equity ETFs, increased global stock index breadth, and hedge funds reducing VIX futures length."

One way to assess the trajectory of this AI bubble is through Japanese private equity company Softbank which is one of the largest and most concentrated investors in OpenAI. Softbank recently sold all of their Nvidia holdings to further concentrate their holdings in OpenAI.

Below is Softbank's chart:

What we see is that this stock which is considered a proxy for OpenAI went parabolic into late October but then it collapsed spectacularly:

Oracle is considered another bellwether for the AI bubble because of its massive future-based $300 billion fantasy contract with OpenAI and due to its substantial debt leverage. Last week, the stock imploded after earnings, but this week it is having a dead cat bounce due to short-covering.

What's interesting about the BofA sell signal mentioned above is that investors are already fully positioned for the economic reflation trade.

From the article above:

"Chief investment strategist Michael Hartnett said investors are bullishly positioned for “run-it-hot” acceleration in purchasing managers index and earnings per share, due to rate cuts, tariff cut and tax cuts."

In other words, the cyclical trade is already crowded.

Recall that the banks and other cyclicals became very over-crowded in 2021 during that Tech (out)rotation as well. The fact remains that cyclicals have much smaller market cap than Tech stocks so it doesn't take much rotation to make them overbought.

What is also interesting is that one of the BofA sell signals mentioned in the article took place in January 2018 which was one year into Trump's first term.

In summary, the theme of 2026 is rotation to explosion. Wall Street just had investors jump out of the pan into the fire.

It's not even the end of 2025 and BofA is saying that their trade for all of 2026 is already on a sell signal.

That's how long it lasted.