Momentum baskets erase summer gains as selling accelerates

Mizuho's note highlights a technical breakdown with real consequences, as momentum baskets falling below the July lows from the Situational Awareness unwind (the bank refers to Morgan Stanley's Tech Momentum Index) indicate the market has completely reversed the rebound after that liquidation. The self-feeding cycle Mizuho outlines, where price declines cause systematic de-risking, is the same force that drove the July volatility, and it often accelerates after technical levels are breached. This latest decline occurs alongside rising bond yields and oil prices due to the intensifying US-Iran conflict, adding a macroeconomic dimension to what began as a positioning and factor unwinding. The broader implication for equities is that high-beta and momentum stocks remain exposed to more forced selling until systematic positioning reaches a level funds are comfortable maintaining.

Ugly Tuesday:

• Nasdaq indices posted sharp declines as the Iran situation intensified

The momentum strategy has surrendered all its summer gains, and Mizuho notes that the selling is now self-reinforcing.

Summary:

• According to Mizuho, momentum baskets have fully reversed, wiping out the recovery since July.
• The baskets have fallen below the lows from the Situational Awareness fund's unwind.
• Mizuho characterizes the move as increasingly self-fulfilling, with systematic strategies reducing risk and prompting additional selling.
• The latest weakness occurs as broader markets decline due to rising bond yields and oil prices linked to escalating US-Iran tensions.
• Technology and high-beta stocks have led the latest session's declines, with semiconductor names especially affected.
• This pattern mirrors July's momentum liquidation, when the Goldman Sachs high beta momentum basket recorded its worst month since 2000 after the Situational Awareness hedge fund's collapse.

According to a Mizuho note, momentum equity baskets have dropped below the July lows from the chaotic unwind, erasing the subsequent rebound from one of the most severe factor liquidations in years. Mizuho strategists say the move is becoming self-fulfilling, as systematic strategies reduce risk in response to price declines, which in turn drives more selling in a fragile market.

This reference point is significant. In July, the Situational Awareness hedge fund's collapse caused margin calls and forced sales across momentum names, contributing to the Goldman Sachs High Beta Momentum basket's worst month since 2000. That event erased tens of billions of dollars before a multi-strategy fund bought the remaining portfolio at a discount, helping to stabilize the selling. Markets then recovered most of those losses through August, with momentum stocks making a partial recovery.

Mizuho's note indicates that the recovery has been completely reversed, with baskets not only retesting but surpassing their July lows. The mechanism Mizuho describes, where price declines lead systematic funds to reduce exposure, which then exacerbates price declines, is the same feedback loop that made the July liquidation chaotic. Once key technical levels are broken, such positioning-driven selling can accelerate rapidly, regardless of any new fundamental catalyst.

This latest decline coincides with a broader risk-off move due to the escalating US-Iran conflict, with higher oil prices and bond yields putting pressure on equities. Technology and high-beta stocks, including chipmakers, have led the recent drops, aligning with sectors most vulnerable to momentum and systematic positioning. It remains unclear whether this deleveraging will be as brief as July's, but Mizuho's view suggests the risk is that systematic selling persists until positioning adjusts to a level funds can tolerate amid the current geopolitical uncertainty.

The index Mizuho references is a proprietary Morgan Stanley index, so the iShares MSCI USA Momentum Factor ETF serves as a proxy. That proxy has not yet broken below its July lows.