Wall Street’s AI, Chip Bets Backfire as S&P 500 Momentum Index Drops More Than 9%

S&P 500 Momentum Index down more than 9% since July

Net short positions in Nasdaq futures hit highest level in 20 years

Momentum investing — buying rising stocks and shorting laggards — has unraveled since July, dealing heavy losses to investors who bet on artificial intelligence and semiconductor winners.

The Wall Street Journal reported on Sept. 2 that the S&P 500 has risen 2.8% since July, while the S&P 500 Momentum Index has dropped more than 9%. Bank of America said its momentum strategy suffered its biggest loss in July since April 2009, during the global financial crisis. If the weakness persists through September, the momentum index would post its worst quarter relative to the broader market in 25 years.

Momentum investors this year bought AI beneficiaries including Nvidia, Advanced Micro Devices and Micron Technology, while shorting stocks seen as vulnerable to the spread of AI. Fueled by that trade, the S&P 500 Momentum Index surged 44% in the second quarter alone, its biggest quarterly gain on record. Over the past five years, it has returned 133%, nearly double the broader market’s performance.

But as more money piled into the same trade, the risk grew that selling would hit all at once when the trend reversed. The latest turn was sparked by a sharp rally in heavily shorted biotech stocks. Moderna jumped about 150% in August alone after positive news on a cancer vaccine it is developing with Merck. Quant funds and hedge funds that had bet against the stock rushed to buy back shares to limit losses, amplifying the surge.

Investors have also increasingly turned bearish on former market leaders. Commodity Futures Trading Commission data show speculative investors’ net short positions in Nasdaq 100 futures have climbed to the highest level in 20 years. While major stock indexes continue to rise, winners and losers at the individual stock level are changing quickly.

Oh Se-song, Hankyung.com reporter sesung@hankyung.com