The momentum trade suffered its worst monthly drawdown in four years, erasing more than a quarter of value from stocks retail investors piled into most.
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Momentum crash wipes 25% from retail-favored stocks in two months
The momentum trade suffered its worst monthly drawdown in four years, erasing more than a quarter of value from stocks retail investors piled into most.
The momentum factor suffered its worst monthly drawdown in four years, with retail-favored stocks plunging more than 25% from their June peak.
"The semiconductor and AI hardware stocks that drove momentum strategies are the same names retail investors have held for years," said Viraj Patel, global macro strategist at Vanda Research. "When those unwind, retail gets hit hardest."
Of the 11 quant factors tracked by Bloomberg, momentum was July's worst performer. The Jefferies basket tracking stocks with the highest retail participation posted its worst month since 2022. Robinhood Markets and Marvell Technology, both retail favorites, were among the hardest hit. The selloff accelerated as hedge funds dumped technology positions at a record pace, driven by mounting doubts about the returns on artificial intelligence investment.
The crash pushed retail participation to its lowest level since the pandemic, with weekly net buying of individual stocks falling to levels not seen since Covid-19 lockdowns. But Wall Street is already calling a bottom: the Bank of America momentum basket surged 8.9% in the past three trading days, the biggest three-day gain since November 2024, while the UBS momentum gauge jumped 11% over the same period, its largest such advance since 2022.
The selloff was triggered by a confluence of catalysts. Concerns about the profitability of massive AI infrastructure spending prompted hedge funds to cut technology positions at a record rate last month, according to prime brokerage data. Renewed geopolitical tensions involving Iran and uncertainty over the Federal Reserve's interest rate path compounded the pressure on what had become one of the most crowded trades in the market.
The damage was concentrated in the names retail investors had piled into most heavily during the "buy everything AI" frenzy. The Russell 1000 high retail participation basket, compiled by Jefferies, has now lost more than a quarter of its value since peaking in June, a decline that mirrors the 2022 growth stock rout.
Retail Investors Turn Selective as Participation Drops to Pandemic Lows
The withdrawal has been stark. Vanda Research data shows weekly net buying of individual stocks has fallen to its lowest level since the onset of the pandemic. JPMorgan Chase & Co. data tells a similar story: retail inflows totaled $57 billion in the week through Wednesday, below the $68 billion weekly average of the past 12 months.
"The slowdown in retail participation aligns closely with the anxiety we're seeing around the momentum unwind," said Arun Jain, equity strategist at JPMorgan.
Yet the data also reveals a more nuanced picture. Rather than fleeing equities entirely, retail investors have become highly selective. Microsoft Corp. and Nvidia Corp. continued to attract meaningful net buying, while Apple Inc. and Tesla Inc. bore the brunt of selling pressure.
"Retail flows are becoming very dispersed," Vanda's Patel said. "It's not like last year when it was 'buy everything AI.' Now retail is being very careful about stock selection."
Wall Street Calls the Bottom as Rebound Signals Emerge
The speed of the selloff has prompted multiple Wall Street trading desks to recommend buying the dip. UBS Securities' Michael Romano told clients the selloff may have already flushed out most of the speculative froth, potentially setting the stage for a price floor. Bank of America's trading desk urged clients to buy US momentum stocks, arguing that the recent profit-taking has created an attractive entry point.
The rebound is already underway. Bank of America's US momentum basket has rallied 8.9% over the past three trading days, the strongest three-day advance since November 2024. UBS's momentum gauge surged 11% in the same window, its largest three-day jump since 2022.
"Both momentum and retail have been on a roller coaster," Vanda's Patel said. "But once the selling pressure subsides and the buyer strike ends, the conditions for a meaningful rebound become increasingly favorable."
The Cboe Volatility Index reflected the rapid shift in investor anxiety, spiking during the worst of the selloff before settling back as the rebound took hold.
This article is for informational purposes only and does not constitute investment advice.
