The former undefeated general fails: The sudden collapse of momentum trading on Wall Street

For years, the strategy of "momentum trading"—buying rising stocks and shorting declining ones—has consistently yielded success. In the first half of this year, this approach was in the spotlight as investors piled into AI star stocks like Micron Technology, Nvidia, and Advanced Micro Devices, while simultaneously shorting companies that might be left behind by the AI wave. The S&P 500 Momentum Index surged 44% in the second quarter, marking its best quarterly performance ever, with a cumulative gain of 133% over the past five years—nearly double the broad market.

However, Wall Street’s hottest strategy has suddenly taken a turn.

A Sudden Reversal: The Worst Quarter in 25 Years

According to The Wall Street Journal on August 30, the S&P 500 Momentum Index has dropped more than 9% since July 1, while the S&P 500 Index rose 2.8% over the same period. The index is on track for its largest quarterly underperformance in 25 years.

Bank of America estimates that July was the second-worst month for momentum trading performance in nearly 40 years—the only worse month was April 2009, during the depths of the global financial crisis.

Goldman Sachs data shows that the basket of hedge fund heavyweights underperformed the S&P 500 by the largest margin in over 20 years in July.

Goldman Sachs also informed clients that August 19 was the worst single day in more than two years for "systematic long-short managers," with about half the losses coming from momentum trades.

Why Momentum Trading Has Worked in the Past

The logic of momentum trading is not complicated: assets with strong upward trends tend to keep outperforming, while those with weak performance tend to lag further behind.

Agustin Lebron, Senior Researcher at EquiLibre Trading, explained, "For decades, running a momentum strategy didn't require much sophistication to generate solid returns."

He further pointed out that one reason is that information dissemination takes time: "A large pension fund can't shift its positions in a single day. Behavioral biases are another reason—people tend to sell winners too early while stubbornly holding on to losers."

Matthew Tym, Managing Director at Cantor Fitzgerald, described this strategy as a "self-fulfilling prophecy"—the more people chase rising stocks, the stronger the rally becomes, which in turn attracts even more participants.

Moderna's Surge: The Trigger Behind the Collapse of Momentum Trading

One of the triggers for this reversal was the unexpected breakout of biotech stocks.

With positive news emerging about the cancer vaccine jointly developed by Moderna and Merck, Moderna's share price has soared about 150% so far this month. Notably, these biotech stocks had been heavily shorted over recent years.

Short sellers were forced to cover their positions, directly hitting numerous quant and hedge funds.

Meanwhile, the collapse of the hedge fund Situational Awareness—the "AI Stock God"—further intensified market turmoil. This fund was heavily exposed to chip stocks and other popular momentum names, and found itself in trouble amid severe market volatility.

Speculators Begin Shorting Momentum Stocks

Some traders have started to short the very stocks that previously fueled the momentum trade.

According to data from the Commodity Futures Trading Commission (CFTC), net short positions by speculators in Nasdaq 100 index futures have recently climbed to their highest levels in nearly 20 years.

Mike Ogborne, founder of San Francisco-based Ogborne Capital Management, said he has become more cautious toward tech stocks and is now holding a higher proportion of cash than usual.

He is uneasy about the persistently rising capital expenditures of tech giants: "It’s a bit like Cinderella and the striking of midnight. You never know exactly when midnight will come," he said. "No one sends a memo to tell you when the capex cycle is over."

Believers Remain Unshaken

Nevertheless, some continue to stick with the strategy.

Antti Ilmanen, Global Co-Head of Portfolio Solutions at AQR Capital Management, commented, "Every strategy has disappointing periods."

Supporters of the momentum approach also point out that the worst months for momentum trading historically have often occurred within longer-term cycles of outperformance.

For now, though, market uncertainty is quietly rising—even as headline indexes continue to climb, the undercurrents beneath the surface are growing turbulent.