Longest Chip Selloff Since 2006 Mints Short Sellers $32 Billion

A historic rout in semiconductor stocks has delivered a windfall for short sellers who were brave enough to bet against what had been one of the highest flying corners of the US equity market for much of the last year.

Contrarian traders have amassed an estimated $32 billion in gross paper gains over the last seven days, according to S3 Partners LLC data compiled by Bloomberg, as the Philadelphia Semiconductor Index sank more than 12%. The chip benchmark, known as the SOX, extended those losses to an eighth straight session on Friday, putting it on track to match its longest losing streak since 2006.

Concerns about higher interest rates, stretched valuations and massive AI infrastructure spending are weighing on chip stocks and the broader market. The S&P 500 Index is on track to end the week 1.7% lower — its worst weekly performance since June. Meanwhile, the tech-heavy Nasdaq 100 Index is set to shed 5% this week.

All but 10 of the 30 constituents in the SOX are down more than 10% since the selloff began. The biggest laggards include shares of Coherent Corp., down nearly 30%, and Astera Labs Inc., Macom Technology Solutions Holdings Inc. and Credo Technology Group Holding Ltd., which have all shed more than 20% in the eight-day selloff.

Read More: Chip Stocks Erase $1 Trillion in Value as Rout Deepens (1)

“The run up in chips was very aggressive so invariably there was going to be some consolidation or pull back,” said Dec Mullarkey of SLC Management.

The recent pain is a sharp reversal from earlier this year when the gauge surged as investors piled into shares of companies set to benefit from the hundreds of billions of dollars in pledged AI infrastructure capital expenditures.

Chipmakers tied to memory were especially strong performers given huge demand for compute against a bottleneck in supply. The SOX more than doubled from the end of March to a record high in June, adding about $6.5 trillion in market value.

Beyond semiconductors, short sellers also netted paper profits betting against shares of CoreWeave Inc., which is on track to shed more than 20% this week after its debt slipped to levels that typically indicate distress. Credit-default swaps on the AI cloud-computing provider are pricing in a more than 50% chance of default within the next five years.

Traders who bet against CoreWeave shares are on track to generate more than $1 billion in mark-to-market profits this week. However, a portion of the outstanding short interest is attributable to convertible bond arbitrage rather than outright directional bearish positions, according to Matthew Unterman, managing director at S3.

“CoreWeave specifically is going to need a new story. It’s going to need time to digest this new reality,” said Joe Tigay, portfolio manager of the Rational Equity Armor Fund.