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I think your question is not really about rebalancing.

If the other stocks in the 90% of your portfolio are also down 40%, fund x is still 10% of your portfolio. So rebalancing is not required.

If on the other hand others holdings are not down, then rebalancing tells you to sell some of the others to bring them down to their specified percentage and reinvest the proceeds in the large cap value funds category.

As to whether fund x or fund y, that is not part of rebalancing. You must decide that on your own as CABob suggests.

Rebalancing is merely a reminder to sell your over valued investments and to invest in undervalued categories when they are down. It is a mechanical device that tells you when to consider changes. But it does not specify exactly what to do.
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