From 'Fear of Missing Out' to 'Fear of Holding': How Long Will the Momentum Sell-off Last?
The technology and momentum positions are far from being cleared, and with multiple pressures from geopolitics, tariffs, and interest rates, high volatility will persist in the third quarter.
Written by: Dong Jing, Wall Street Journal
Beneath the surface calm of global stock markets, a historic collapse of momentum strategies is accelerating. Goldman Sachs trader Benny Quek warns that positions in the AI and technology sectors are far from being cleared, and volatility will continue in the third quarter.
The momentum factor has fallen for five consecutive weeks, and leveraged ETFs have experienced a historic collapse, with market sentiment rapidly shifting from 'fear of missing out' to 'fear of holding.' Meanwhile, the core contradiction of the AI narrative has shifted from capital expenditure to profit margins and returns, with credit spreads for large-scale cloud providers widening sharply, putting pressure on the market.
Multiple pressures are fermenting simultaneously—geopolitical conflicts, oil price fluctuations, interest rate trends, and the renewed risk of tariffs, all vying to dominate market pricing. Goldman Sachs' risk appetite indicator remains high, while the implied correlation among S&P 500 constituents is extremely low, providing structural support for going long on index volatility.
Momentum Collapse Enters Fifth Week, Leveraged ETFs Hit Hardest
The collapse of the momentum factor is the most significant structural feature of the current market.
According to Goldman Sachs trader Benny Quek in his latest 'Weekend Thoughts' report, the unwinding of momentum strategies has been ongoing for five weeks, accompanied by the historic collapse of leveraged ETFs.
Taking the South Korean market as an example, the size of leveraged ETFs has halved from a peak of $53 billion to about half, with leveraged exposure dropping from a peak of 3.3% of the market's free float market cap to 2.1%.
The daily rebalancing flows for Samsung and SK Hynix have also significantly decreased, falling from 40% and 26% of the average daily trading volume over the past month to 15% and 14%, respectively. The KOSPI has recorded five consecutive weeks of declines, creating a disturbing contrast with the performance of China's CSI1000 from 2014 to 2015.
The U.S. market is similarly under pressure. The high momentum vs low momentum stock hedge pair fell 8% in a single day last Friday, although it still recorded a 4% gain for the week, the volatility has fully revealed the fragility of positions.
AI Narrative Shifts, Credit Spreads for Large Cloud Providers Widen
The logic of AI trading is undergoing a fundamental shift.
Quek points out that the market's focus has shifted from the capital expenditure headlines of large-scale cloud providers to more challenging core issues: profit margins, return on investment, and the continuously rising scale of debt issuance.
Goldman Sachs estimates that year-to-date bond supply related to AI has reached $489 billion, with 40% coming from large-scale cloud providers, equivalent to 1.5 times the full-year forecast for 2025. Meanwhile, credit spreads for large-scale cloud providers are widening sharply, and the pressure of rising debt financing costs is unavoidable.
From a market capitalization perspective, the S&P 500 has grown by $31 trillion since December 2022, while Goldman Sachs' estimates of AI's potential value are $9 trillion, $8 trillion, and $28 trillion under baseline, optimistic, and blue-sky scenarios, respectively. This comparison suggests that the current expansion of market capitalization has largely overdrawn the potential upside of AI.
Positions Are Far from Cleared, High Volatility Remains the Main Theme in Q3
Quek clearly states that he believes the positions in AI, technology, and momentum strategies are far from the 'clean' state expected by the market, and he remains highly vigilant about the continued high volatility in the third quarter.
He tends to adopt a 'barbell' strategy to cope with the current environment, allocating both defensive assets and selected offensive positions to navigate the uncertain oscillating market.
From a technical indicator perspective, although the volatility at the individual stock and factor levels has surged significantly, the implied correlation among S&P 500 constituents remains extremely low. Quek points out that this divergence provides additional structural reasons for going long on index volatility—low correlation means that index-level volatility is underestimated, and once correlation rebounds, index volatility will be amplified.
Goldman Sachs' risk appetite indicator remains high, indicating that overall market sentiment has not fully reflected the aforementioned risks, further supporting cautious predictions for volatility.
Rotation and Differentiation: Structural Opportunities in Asian Markets
Despite the overall environment being full of pressure, signs of capital rotation are quite evident in Asian markets. The Jakarta Composite Index (JCI) has rebounded 16% from its lows, and India has recorded the strongest monthly foreign capital inflow in the region, with funds migrating from high momentum, high valuation sectors to more defensive and value-oriented assets.
From a sector perspective, the rotation trend is clearer. The software sector's relative pricing against semiconductors has broken above the 50-day moving average, indicating that the structural rebalancing within the market is still ongoing.
Additionally, there are noteworthy signals in the gold market: CFTC gold futures positions are increasing, which historically has led the spot gold price; meanwhile, China's gold imports in June surged to a two-year high, and the potential support from safe-haven demand cannot be overlooked.
Quek also expects that as the U.S. midterm elections approach, the market will experience more headline volatility.
Historical data shows that the U.S. stock market typically consolidates before midterm elections and tends to strengthen afterward. This pattern may provide a phase-based time anchor for the currently pressured market, but before that, how long the momentum sell-off will last remains the biggest suspense in the market.
Global stock markets were flat overall last week, but this figure masks the internal turbulence. The market had previously largely ignored the ongoing geopolitical conflicts, oil price trends, and interest rate changes, but these three forces have now simultaneously entered the market's view, competing for pricing power.
At the same time, the tariff issue has heated up again, adding new uncertainties to an already fragile market sentiment. Quek points out that this year's volatility has been extremely exhausting for investors, and the market is in a complex stage of intertwined narratives with unclear directions.
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