S&P 500 momentum trade sees biggest unwind since 2001 as rotation broadens

The unwind of the momentum trade is the sharpest since the early 2000s, yet the S&P 500 has barely budged — a sign the market is rotating, not breaking.

The S&P 500 momentum factor suffered its sharpest sell-off since the early 2000s, as a broadening rotation into lagging sectors pushed high-flying chip and growth stocks lower.

"Over the past three weeks, market leadership has been tested, with the momentum factor delivering the sharpest sell-off since the early 2000s," Goldman Sachs strategists wrote in a note this week.

The Invesco S&P 500 Momentum ETF has fallen 5 percent from its recent peak. The sell-off has been concentrated in semiconductor and growth names, while real estate, low-volatility stocks and dividend payers have absorbed the selling. The S&P 500 held near 7,600, supported by the rotation.

The divergence between momentum and value suggests the market is repricing leadership rather than heading for a broad decline. With the July Federal Reserve meeting approaching and the Producer Price Index due Wednesday, the next catalyst will test whether the rotation has legs or the unwind accelerates.

Where Goldman Sees Shelter

Goldman Sachs identified five areas with low correlation to the momentum trade. Software stocks, beaten down in the "SaaSpocalypse" earlier this year, have bounced 25 percent from their April low, with Palo Alto Networks gaining 24 percent and CrowdStrike rising 21 percent in the past month. The iShares Expanded Tech-Software Sector ETF remains down 9 percent for the year.

Real estate has been the strongest performer among the safe havens. The Vanguard Real Estate Index Fund ETF is up 10 percent year to date, narrowly outpacing the S&P 500. Dividend Aristocrats — S&P 500 companies that have raised payouts for at least 25 consecutive years — have the lowest correlation with the momentum trade, according to Goldman's analysis. The ProShares S&P 500 Dividend Aristocrats ETF has gained 7 percent this year.

Low-volatility stocks have also held firm. The iShares MSCI USA Min Vol Factor ETF is up 3 percent for the year. On the fixed-income side, the ICE BofAML MOVE Index, a gauge of bond volatility, dropped 3 percent on Monday and is down 32 percent from its peak in late March, though the Vanguard Total Bond Market Index Fund ETF is still down 1 percent year to date.

Cross-Asset Divergence

The rotation is playing out against a mixed macro backdrop. The 10-year Treasury yield climbed to around 4.60 percent and the 2-year yield moved near 4.21 percent after both dropped on Tuesday's softer-than-expected CPI print. The CME FedWatch tool showed the probability of a July rate hike collapse from 42 percent to 17 percent after the data, though September still carries 63 percent odds of higher rates.

Oil prices remain elevated, and the artificial intelligence buildout continues to push power demand higher — forward inflation inputs that Tuesday's CPI print did not erase. The Producer Price Index release Wednesday morning will serve as the tiebreaker: a soft print extends the rate relief that started Tuesday, while a hot core reading reopens the debate and could cap equity gains.

The S&P 500 is building a base above its 50-day moving average at 7,524, with resistance at 7,629 and 7,649 before the record high at 7,694. The setup favors the breakout, but the tape needs buyers willing to pay up. PPI and the next round of earnings are the catalysts that either produce the move or keep the market building passively.

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