AI Spending Woes and Rising Oil Prices Weighed on Markets. The Nasdaq Had its Worst Day in Months.

Stocks plummeted on Thursday amid rising geopolitical tensions and renewed concerns about AI-related spending.

The Dow Jones Industrial Average edged up 0.02%. But the S&P 500 dropped 1.21% and the tech-heavy Nasdaq Composite plunged 2.60%. The former had its worst day since late July and the latter since June 23.

In fact, hedge funds are building bets against stocks to unusually elevated levels, creating conditions that could turn a market rebound into a sharp rally as bearish investors scramble to unwind their positions.

Bloomberg reported Thursday that hedge funds' bearish stock exposure was approaching a five-year high, citing Goldman Sachs data. The buildup raises the risk of a short squeeze, in which rising prices pressure short sellers to buy back shares, potentially accelerating the advance.

Short sales have outpaced long purchases across global equities by about five to one this month. Short leverage in Goldman's prime brokerage book stood at the 99th percentile of its five-year history, indicating bearish exposure was higher than in almost all of that period.

The figures reveal a market increasingly positioned for weakness and expose a vulnerability. Investors seeking protection against falling prices can become buyers if markets move against them.

Goldman's data showed net leverage among fundamental long-short funds near a three-year low, even as gross leverage increased. Net leverage measures the difference between long and short exposure, while gross leverage combines both. The combination suggests reduced directional exposure without a corresponding retreat from overall trading commitments.

Elsewhere, oil prices climbed further after Iranian forces said they hit seven vessels attempting to cross through the Strait of Hormuz. Should the figure be confirmed officially, it would be the largest for a single day since the war began in late February.

Prices are climbing even though oil exports from the Persian Gulf have surpassed levels recorded before the war as U.S. protection, alternative pipelines and lucrative shipping deals keep crude moving despite attacks on tankers.

Flows through Hormuz and alternative regional routes averaged more than 24 million barrels daily during the week ended October 18, according to The Wall Street Journal, which cited ship-tracking company Kpler. That exceeded the prewar average of 23.3 million barrels.

However, traffic through the Hormuz Strait itself remains below its previous level. Preliminary Kpler figures put flows through the strait, including offshore transfers in the Gulf of Oman, at approximately 14 million barrels daily, equivalent to 82% of prewar volumes.