S&P 500 reverses 0.7% gain as momentum trade unwinds

The S&P 500 turned negative Monday after rising 0.7%, extending a selloff that pushed the benchmark 1.5% below the prior week's close to 7,457.69.

The S&P 500 erased a 0.7% intraday gain to close lower Monday, as the unwind of momentum and AI infrastructure trades deepened.

"The momentum factor has seen its volatility surge to the highest level of its 45-year history excluding recession years," said Ben Snider, equity strategist at Goldman Sachs.

The iShares MSCI USA Momentum Factor ETF has declined 12% since July 1, while the S&P 500 has been roughly flat over the same period. The VanEck Semiconductor ETF is down 18% from its late-June peak, approaching bear market territory. Consumer discretionary and transportation stocks have outperformed the S&P 500 by 12% over the past two months, according to Morgan Stanley equity strategist Michael Wilson.

The rotation out of high-flying AI names and into lagging sectors has renewed debate about whether the bull market can broaden beyond mega-cap technology. Wilson said the firm's year-end S&P 500 target of 8,000 remains "very achievable," implying 7% upside from current levels. On the downside, he said a spillover from AI stocks could push the index to 7,000 before the bull market resumes.

Technical Levels and Breadth

The S&P 500 briefly slipped below 7,530 last week before dip-buyers pushed it back above 7,500, according to Adam Kobeissi, analyst at The Kobeissi Letter. The index's daily Relative Strength Index bounced back above 50, a historically bullish signal, while Bollinger Bands between 7,345 and 7,615 suggest the uptrend remains intact. Kobeissi said he targets 7,700 with a 7,200 stop-loss.

Fundstrat's head of technical strategy, Mark Newton, identified 7,421 as a make-or-break level. "Until these levels are violated along with a breakdown in the equal-weighted S&P 500's trend, I'm still inclined to view Technology's decline as something the broader market can absorb," he said.

The equal-weight S&P 500 ETF has risen 11% year-to-date, edging out the cap-weighted S&P 500's 9% gain — a sign that breadth is improving even as mega-cap tech stocks struggle. The Dow Jones Transportation Average recently closed near its all-time high, Newton noted. The Nasdaq 100 recently broke back above its 50-day moving average and is trading less than 1% away from that level, while the S&P 500 remains within 1% of its own 50-day MA.

Chip Sector Under Pressure

Piper Sandler analysts led by Craig Johnson warned the semiconductor ETF is trading 18% below its 50-day moving average, its lowest level in eight weeks. A breach of the 200-day moving average could imply another 20% decline in the chip sector, they said. Snider at Goldman said "history, positioning, and lack of a favorable catalyst point to continued near-term challenges" for AI infrastructure momentum stocks.

Bespoke Investment Group noted the Nasdaq 100 has seen more than 20 trading sessions with at least a 1% swing in either direction over the last 50 days, even as the index traded in a range where its high was less than 10% away from its low. In instances dating back to 1971, the index posted a negative median return over the next six months after flashing this pattern, said Paul Hickey, the firm's cofounder.

The CME Group's FedWatch Tool shows only one quarter-point rate hike with a greater than 50% probability in the forecast range, at the Fed's Sept. 16 meeting. The Atlanta Fed's GDPNow estimate for second-quarter real GDP growth rebounded to 1.7% from 1.2% the prior week.

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