MW Nomura strategist warned the market selloff was coming . Here are the forces he says are taking stocks down.

By Barbara Kollmeyer

Highly-leveraged ETFs are back to haunt the stock market

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Investors paying attention to Nomura's cross-asset strategist Charlie McElligott would have had an inkling Thursday's market selloff was coming.

Filled with terms like gamma and vol puking, market dispatches from the strategist the FT once described as a "meat-powered market mystic" do not make for easy reading. But an Oct. 30 note indicated his finger has been on the pulse of troubling undercurrents for markets.

He wrote of an "anti-dispersion" phenomenon due to hit markets in a couple of weeks, given the market was being unevenly driven by big tech players. The strategist flagged two other of pressure: tax-loss harvesting, in which stocks are sold by mutual funds and other managers at a loss to offset capital gains, reducing their tax liability; and year-end window dressing, where managers try to spiff up portfolios for the year-end by buying fast-rising winners and selling losers.

Both can weigh on already poorly performing stocks. Granted, the winners struggled on Thursday as well - the Nasdaq COMP, up 18%, this year fell over 2%; the Russell 2000 RUT, which is up only single digits, fell nearly 3%.

McElligott's "I-told-you-so" follow-up warned of a possible "negative wealth effect" that could impact the broader economy as popular tech stocks and cryptocurrency sell off. After the worst losses since Oct. 10, stock futures (ES00) (YM00) (NQ00) indicated more selling for Friday. Bitcoin (BTCUSD), meanwhile, was sliding further under the six-month low it reached on Thursday.

He said the market was also feeling the heat from economic jitters, with reports that Verizon $(VZ)$ was poised to lay off 15,000 workers and a rising view that the Federal Reserve was likely to hold interest rates in December, for lack of data.

Also read: Here's an unexpected twist that could throw the stock-market rally off course next year

McElligott stressed that the market breakdown was largely mechanical, which was broken down in a Substack post by an options trader who identifies himself as Doc Trader McGraw.

Apart from year-end protection and polishing of portfolios, McElligott flagged so-called negative dealer gamma - net positioning of options dealers -on the S&P 500 SPX and Cboe Volatility Index VIX.

"What does negative gamma mean in plain English? It means dealers amplify every move instead of dampening it," McGraw said, explaining that when markets start to sell off, those traders must sell more futures to hedge their positions. That pressures stocks, and ends up forcing them to sell more and add even more pressure.

There's a final important factor behind Thursday's selloff, which McElligott blamed on increasingly popular leveraged exchanged traded funds (ETFs), designed to amplify daily performance of market indexes, a risky trade if markets end up selling off. He said investors are starting to understand that those are a "massive force in the current market structure."

His chart shows how assets under management for those ETFs have exploded in the last year or so:

Analyzing securities filings last month, MarketWatch's Joe Adinolfi reported that since the start of October, issuers have filed for permission to launch more than 100 funds targeting 3x or 5x leverage on big tech stocks such as Nvidia, cryptocurrencies, stock-market indexes and existing ETFs.

As McGraw explained, when the market sees major selling during a session, leveraged ETFs must rebalance by selling at the end of the trading day to keep target leverage ratios. Nomura's strategist estimated that around $17 billion would have to be sold into the close of Thursday's trading.

McGraw added that systematic Commodity Trading Advisors $(CTA)$ trend-following funds, also probably piled on Thursday, as they would be forced to sell if specific technical levels are reached.

"The breadth collapse you saw wasn't just retail puking or hedge funds panicking. It was multiple systematic flows all hitting the sell button at roughly the same time, each one amplifying the others," McGraw wrote.

And in his view: these dynamics for markets will remain in play and a healing for stocks isn't coming soon, given stock rallies are still highly dependent on major tech stocks.

-Barbara Kollmeyer

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November 14, 2025 05:38 ET (10:38 GMT)

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