July ends on a hopeful note for stocks after momentum trade sees biggest wipeout since 2000
Despite a last-minute recovery, chip stocks and other popular momentum names still finished July sharply lower. – Getty Images Friday capped off an eventful six-week stretch in markets, as hard-hit momentum names completed a powerful two-day comeback rally — ending a turbulent stretch for the strategy on a high note. The reprieve — which followed…
Despite a last-minute recovery, chip stocks and other popular momentum names still finished July sharply lower. – Getty Images
Friday capped off an eventful six-week stretch in markets, as hard-hit momentum names completed a powerful two-day comeback rally — ending a turbulent stretch for the strategy on a high note.
The reprieve — which followed news that a highflying and heavily leveraged AI-focused hedge fund had sold its equity portfolio — helped semiconductor stocks cement their biggest two-day rally since June, Dow Jones Market Data showed.
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Yet despite the last-minute recovery, chip stocks and other popular momentum names still finished the month sharply lower, hinting at a level of carnage beneath the surface that was largely masked by performance at the index level. The Nasdaq Composite COMP fell by about 3% in July, Dow Jones Market Data showed — its worst monthly showing since March, and a second straight monthly drop. The S&P 500 SPX, meanwhile, remained within striking distance of its early-June record high despite also finishing lower for a second straight month.
July saw the worst monthly performance for the Goldman Sachs High Beta Momentum Basket since November 2000, according to data from Bloomberg. Many of the basket’s long positions came under pressure, while its short holdings — including a number of hard-hit software stocks — rallied.
After the blowup of Leopold Aschenbrenner’s Situational Awareness hedge fund, it would seem the pressure from forced selling is over, said Michael Dickson, head of research at Horizon Investments. But whether hard-hit chip names can mount a sustainable comeback remains to be seen.
“The question really is: Are we at the bottom of the momentum rotation?” Dickson asked.
Fundamentals take a back seat
The artificial-intelligence trade started to wobble in June after red-hot chips stocks, including popular memory plays like Micron Technology MU, went parabolic in April and May.
Investors who were hoping that a strong second-quarter earnings season would help to refresh it were sorely disappointed. Even as hyperscalers like Google parent Alphabet GOOGL GOOG confirmed that they would continue pouring hundreds of billions of dollars into the AI buildout, semiconductor stocks, power stocks, industrials and other names that had benefited from bottlenecks driven by the buildout continued to struggle.
As fundamentals like companies’ earnings and spending plans took a back seat, investors shifted their focus to a powerful rotation away from chips and into software, financials, real estate and other corners of the market that had been more recently out of favor.
A rebound in oil prices CL00 BRN00 also pushed energy stocks to a strong monthly gain, while Apple AAPL was a notable mover — shooting higher in July, only to give back much of its gains in the final session of the month after its earnings left investors disappointed.
“Fundamentals have taken a complete back seat in the past six weeks,” wrote HSBC’s Max Kettern in commentary shared with MarketWatch.
Already, the technical picture for stocks is brightening, signaling that the rebound in chip stocks and the broader momentum factor seen this week might continue, Kettern wrote.
The S&P 500 closed above its 50-day moving average on Friday after a brief spell below it. The Cboe Volatility Index VIX, better known as the VIX or Wall Street’s “fear gauge,” beat a hasty retreat, pulling back to 15.99 on Friday after topping 20 earlier in the week. At 20, the index was above its long-term average — a sign that the July momentum selloff was finally starting to have an impact on volatility at the index level.
At one point, the growing divide between the market’s winners and losers pushed dispersion within the S&P 500 to one of the widest levels on record. Whether next month sees the return of broad gains remains to be seen.
There are signs that the market has reached an inflection point, according to Mark Hackett, chief market strategist at Nationwide. For example, the one-month average daily percent change for the Goldman Sachs High Beta Momentum Basket surged to its highest level since 2020 in July.
That volatility measure has peaked in the past around important inflection points, including the COVID selloff, the dot-com bubble peak and the bottom of the selloff after the 2008 financial crisis, Hackett pointed out.
Mike Shell, chief investment officer of Shell Capital, said that he has seen data furnished by his prime brokers that suggest this latest momentum liquidation is closer to its end than its beginning. That doesn’t mean the exact low is in, but it does mean the balance between risk and reward is starting to look more attractive.
“The question now is whether the unwind is exposing a fundamental problem or simply clearing out an overcrowded trade. 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 told MarketWatch.
To be sure, there are still plenty of reasons for investors to be concerned about stock-market performance over the next couple of months. August and September tend to see the weakest two-month performance of the entire calendar year, as Ryan Detrick, chief market strategist at Carson Group, pointed out on X. One question investors will likely have: Was this year’s typical late-summer volatility pulled forward?
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