Momentum stocks crash 17.4% in historic rout as BTIG warns of trap

The fastest momentum crash in modern history may set up a tech rebound that ultimately traps buyers, according to BTIG.

The S&P 500 fell 1.5% to 7,316.15 on Wednesday as the fastest momentum crash in modern history erased 17.4% from high-flying tech stocks in four days.

"Some reprieve is in order, but we don't know if that rally will hold," said Jonathan Krinsky, chief market technician at BTIG, in a note to clients.

The PHLX Semiconductor Index slid 5.3%, its worst session since early July, while the Nasdaq Composite logged its sixth straight loss — the longest such run since April 2024 — falling 1.7% to 24,442.94. The Dow Jones Industrial Average dropped 2.2%, or 1,153 points, to 51,594.14. Krinsky's MS Sector-Neutral Momentum Index posted a 17.4% decline over four sessions, surpassing drawdowns seen after the dot-com bust, in 2022 and following the Covid-19 pandemic. The Goldman Sachs High Beta Momentum Pair, which tracks a strategy of buying winners and shorting losers, now sits 23% below its 200-day moving average after trading 40% above that level in mid-June.

The selloff coincided with the 30-year Treasury yield touching 5.246%, its highest since 2007, as investors questioned whether Fed Chairman Kevin Warsh will act aggressively enough on inflation. Rising yields pressure tech stocks by discounting future cash flows and raising borrowing costs at a time when Big Tech's AI spending is already under scrutiny.

The catalyst for Wednesday's decline was twofold: the Federal Reserve held rates unchanged at its July meeting, and the 30-year bond yield broke to multiyear highs, triggering a rotation out of the most crowded trades. Brent crude jumped 7.3% to above $88 a barrel, adding to inflation concerns that have kept long-term yields elevated.

All 11 GICS sectors finished lower. Technology and communication services led the decline as investors fled momentum names that had powered the market's first-half gains. The S&P 500 equal-weight index, which had been hitting all-time highs even as the Nasdaq pulled back, also fell 1.6%, suggesting the selling was broad-based. The Russell 2000 index of smaller companies dropped 1.6% to 2,906.31.

Krinsky warned that a bounce in momentum stocks could come quickly but may prove fleeting. He drew a parallel to 2000, when the SOX index sank 35% in a month after the dot-com peak, then surged 37% before resuming its decline. A 20% rally from current levels would bring the SOX back to its 50-day moving average, where Krinsky expects it to fail again before eventually testing the 200-day moving average.

"If we are wrong about this potential bounce, we could see a correlation-one selloff like August 2024," Krinsky said, suggesting that the equal-weight trade — which has benefited from the rotation out of megacap tech — could also get caught in the downdraft.

The VIX, Wall Street's fear gauge, rose 2.4 points to 24.6, its highest level in three months, as options traders priced in elevated volatility through the remainder of earnings season. Apple and Amazon are scheduled to report after the close Thursday, with Coinbase also on deck.

This article is for informational purposes only and does not constitute investment advice.