Momentum trade suffers worst wipeout since 2000 as AI names rebound

The S&P 500 closed above its 50-day moving average Friday as a two-day rebound capped the worst monthly momentum wipeout since November 2000.

"The question really is, are we at the bottom of the momentum rotation?" said Michael Dickson, head of research at Horizon Investments.

The Nasdaq Composite fell about 3 percent in July, its worst monthly showing since March and a second-straight drop, even as the S&P 500 stayed within striking distance of an early June record. The Cboe Volatility Index retreated to 15.99 on Friday after topping 20 earlier in the week. The iShares MSCI Momentum Factor ETF jumped 5.5 percent Thursday, its biggest daily advance since April 9, 2025, while the Nasdaq-100 popped 3.4 percent, its best day since May 12, 2025.

The unwind followed the forced liquidation of Leopold Aschenbrenner's Situational Awareness hedge fund, with Citadel reaching a deal to buy the shares. Whether the rebound marks a durable bottom or a technical bounce in an overcrowded trade will be tested in August and September, historically the weakest two-month stretch of the calendar year.

The momentum rout began in June as chip stocks, including memory plays like Micron Technology, went parabolic in April and May before reversing. Even as hyperscalers like Alphabet confirmed hundreds of billions in AI capital spending, semiconductor stocks, power names, and industrials continued to struggle. Investors rotated into software, financials, real estate, and other out-of-favor corners of the market.

"Fundamentals have taken a complete back seat in the past six weeks," wrote HSBC's Max Kettern.

The forced unwind of Situational Awareness, which held large positions in Nebius, Micron, CoreWeave, and SanDisk, triggered a fire sale that briefly sent the S&P 500 to its lowest since mid-June on Wednesday. Nebius surged 27 percent Thursday and added another 10 percent in early Friday trading. The Philadelphia semiconductor index jumped nearly 8 percent Thursday, while South Korea's Kospi posted its largest single-day gain on record.

Correlation index surges as breadth improves

The Cboe 1-month implied correlation index, which measures expected correlation between the top 50 S&P 500 stocks, surged from 3.3 on July 10 to above 12 this week, indicating a broader-based rally. When the S&P 500 fell Wednesday following the Fed meeting, only one stock in the index registered a 52-week low.

Options positioning data from SpotGamma and Barchart shows the S&P 500's seesaw action centered around 7,500, with market makers buying dips below that level and selling rallies above it. A break below 7,450 could open the door for a bigger downside move, according to SpotGamma founder Brent Kochuba.

Mark Hackett, chief market strategist at Nationwide, noted that the one-month average daily percent change for the Goldman Sachs high beta momentum basket surged to its highest level since 2020 in July — a volatility measure that has peaked around important inflection points, including the COVID selloff, the dot-com bubble peak, and the bottom of the post-2008 financial crisis market.

Mike Shell, chief investment officer of Shell Capital, said prime broker data suggests the momentum liquidation is closer to its end than its beginning. "If AI demand, earnings, and capital spending remain intact, I view the drawdown as an opportunity to begin selectively buying the strongest AI companies — not necessarily the basket itself," Shell said.

Oil prices rebounded in July, pushing energy stocks to a strong monthly gain, while Apple shot higher before giving back much of its gains after disappointing earnings. Long-term borrowing costs also surged during the week as Treasury yields rose.

Jeff DeGraaf of Renaissance Macro Research cautioned that "dashes of that size have historically been the property of a downtrend, not the starting gun for a fresh race."

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