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Nvidia ( NVDA ) plunge reflects stretched market - analysts

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High bond yields may dent stocks' appeal

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Investors still betting heavily on rising dollar

By Naomi Rovnick, Harry Robertson and Amanda Cooper

LONDON, Jan 31 (Reuters) - In a week when AI chipmaker

Nvidia ( NVDA ) suffered the biggest one-day loss of value on record and

the Federal Reserve said it was in no hurry to cut rates again,

a few gauges underscore markets' vulnerability to big swings.

Investors and analysts said the sell-off in tech stocks this

week, driven by the popularity of China's DeepSeek AI model,

highlights the market ructions that can occur when heavy

speculation meets unexpected bad news.

Here are five signals that highlight some of the tensions

simmering.

1/HEAVY BETTING

Despite Monday's ructions investors remain bullish about

U.S. tech and President Donald Trump's plans for tax cuts and

deregulation, heightening risks of market gyrations if this

widespread consensus proves wrong.

Short-term speculators have in recent months taken on more

debt to magnify their gains, with levels of so-called gross

leverage among hedge funds that trade U.S. stocks hitting their

highest since 2010 in January, Morgan Stanley data showed.

Citi's equity positioning model, derived from futures

contracts, shows traders are heavily betting on further gains

for Wall Street's tech-focused Nasdaq 100.

"Everyone is sort of piled in. They're super optimistic,"

GAM chief multi-asset strategist Julian Howard said.

These trends are making some long-term money managers

nervous, with JPMorgan attributing part of Nvidia's ( NVDA ) violent Jan.

27 drop to traditional asset managers selling out.

Kevin Thozet, investment committee member at Carmignac, said

he had reduced exposure to U.S. tech stocks several days ago and

added to positions that would profit if the Nasdaq fell, saying

DeepSeek called U.S. tech-stock "exceptionalism" into question.

High-for-longer U.S. interest rates, he added, might prompt

U.S. households, now heavily invested in stocks, to pull money

out.

Analysis by the U.S. Office of Financial Research has also

found strong correlations between retail investment in

speculative assets, such as crypto-currencies and use of

consumer credit, signaling last year's rate cuts fueled market

gains.

2/ PRICES ARE NOT RIGHT?

The highest bond yields in years could also dent stocks'

appeal as investors can now get returns of 4% or more on

government debt.

One measure of the equity risk premium - the extra return

investors can expect for stocks - dropped below zero in December

for the first time since the aftermath of the dot-com bubble in

2002.

"When people talk about managing volatility amidst all this,

one of the areas which does it really well is short-dated fixed

income," said GAM's Howard.

3/ DOLLAR WOBBLE

Since the Nov. 5 U.S. election, traders have doubled the

size of their bets that the dollar will rise.

They now hold net short positions - a bet on the value of

something falling - in all other major currencies. This has only

happened on rare occasions in the last 10 years, LSEG data

shows.

Much of this positioning is predicated on the Fed cutting

rates more slowly than elsewhere, and an assumption that tariffs

and tax cuts spark higher inflation and government borrowing,

meaning any change to that scenario could be problematic for the

U.S. currency.

4/ HAVEN-HUNTING

High concentration in tech stocks has made portfolios

vulnerable, analysts say, and a rush to alternatives, such as

Japan's yen and European credit, is another sign of

fast-changing market dynamics.

As European shares have hit record highs, Bank of

America data showed money has flowed into European credit funds

for 23 consecutive weeks.

5/ EYE OF THE STORM?

The VIX, which measures how volatile traders expect the S&P

500 to become, is below its long-run average of about 20.

But it has spiked out of nowhere twice in the last six

months, once in August when a surge in the yen wreaked global

havoc and again in December when the Fed hinted it would slow

the pace of rate cuts.

Rob Almeida, global investment strategist and portfolio

Manager at MFS International, described markets as "fragile" and

said Monday's heavy stock selling may have been driven by

"leverage that might be being unwound and isn't being accounted

for".