Have you ever watched a house of cards collapse in slow motion? That’s pretty much what the momentum trade feels like right now—teetering, then suddenly giving way under its own weight.
I’ve been tracking these factor shifts for years, and let me tell you, the current unwind hits different. It’s not just a quiet rotation; it’s a full-blown momentum massacre that’s starting to pull the rug out from under the entire market.
Picture this: stocks that were flying high on pure price action are now plummeting, and the pain is spreading faster than anyone anticipated. But why now? Let’s unpack it step by step.
The Great Momentum Unwind Begins
It started subtly, almost innocently. A few high-flyers missing earnings whispers, some profit-taking ahead of the holidays. But overnight, it escalated into something much bigger—a systematic degrossing of overcrowded trades.
In my experience, these moments always follow a pattern. The longs get too extended, shorts cover too aggressively, and then boom: the reversal hits like a freight train. This time, the high-beta momentum basket is ground zero.
We’re talking about names that were up 30%, 50%, even 100% on the year purely because they were going up. No fundamentals required—just relentless buying pressure. Now? That pressure is reversing hard.
The outperformance from momentum this year has been almost entirely driven by the long side—and that leg is now at serious risk.
Think about it. When everyone piles into the same trade, the exit door gets awfully small. And right now, investors are scrambling for that door.
How Bad Is the Damage So Far?
Let’s look at the numbers—they don’t lie. Over the past week alone, we’ve seen momentum longs dumped at a pace that rivals the March 2020 volatility spike.
The pure momentum factor? Down sharply. Custom baskets tracking high-beta names? Getting absolutely hammered, with drawdowns accelerating each session.
Perhaps the most telling sign: momentum shorts, which had been toxic to hold, are suddenly being bid. That’s a double whammy—the longs lose value while the shorts you avoided start working against the factor’s overall performance.
- Six consecutive days of long liquidation in momentum names
- Short covering paused only briefly before resuming
- High-beta cohort underperforming the market by the widest margin in months
- Bleeding now visible in equal-weight indices
It’s not contained anymore. What started in a narrow pocket of the market is seeping into broader indices. The S&P 500 might still be holding up on the surface, but peel back the layers, and the cracks are obvious.
I’ve found that these factor rotations rarely stay isolated. Once the momentum crowd starts protecting gains, it creates a feedback loop. Less risk-taking means lower volatility, which hurts the exact names that thrived in the prior regime.
Why This Matters for the Broader Market
You might be thinking: “Okay, momentum is blowing up—so what? I don’t own those crazy stocks.” Fair point. But here’s where it gets interesting.
The market’s leadership this year has been disproportionately concentrated in momentum-driven names. When they falter, the market cap-weighted indices feel it less at first—but the equal-weight versions? They get crushed.
And guess what? The pain is now showing up there too. That tells us the rot is spreading beyond just the usual suspects.
When momentum starts bleeding into broad markets, it’s rarely a one-day event. This is structural unwinding.
– Seasoned portfolio manager
Consider the psychology at play. Portfolio managers who chased performance all year are now staring at year-end bonuses. Do they ride the momentum trade lower, or lock in gains? Most choose the latter.
That collective decision creates selling pressure that feeds on itself. One fund de-risks, another follows, and suddenly you have a cascade.
In my view, this is classic late-cycle behavior. Not saying the bull market is over—far from it—but the character of this rally is changing, and fast.
Seasonal Headwinds Are Just Beginning
If you think this is bad now, buckle up. The data on momentum performance during November through January is brutal.
Historically, these are the worst three months for the momentum factor. Why? A combination of tax-loss harvesting, portfolio rebalancing, and reduced liquidity as traders head to the beach—or in this case, the ski slopes.
It’s not coincidence. The same dynamics that amplified gains during the upswing now magnify losses on the way down.
| Period | Avg Momentum Return | Win Rate |
| Feb-Apr | +4.2% | 68% |
| May-Jul | +2.8% | 62% |
| Aug-Oct | +1.1% | 55% |
| Nov-Jan | -3.7% | 38% |
See that? The November-January period stands out like a sore thumb. And we’re walking right into it with momentum already wounded.
Now, past performance isn’t destiny, but when you combine seasonal weakness with current technical damage, the risk/reward skews heavily to the downside for momentum longs.
I’ve learned to respect these patterns. They don’t call every turn, but ignoring them entirely is a recipe for pain.
The Role of Narrative Themes in the Meltdown
Momentum doesn’t exist in a vacuum. It’s fueled by stories—AI revolution, clean energy boom, whatever the hot theme du jour happens to be.
This year, those narratives carried tremendous weight. But narratives have a shelf life, and when they start to crack, the momentum trade cracks with them.
We’re seeing it play out in real time. The “AI will solve everything” trade? Cooling off. The “rate cuts forever” bet? Facing reality checks. Each cracked narrative chips away at the foundation of momentum leadership.
- Theme emerges and gains traction
- Capital floods into related names regardless of valuation
- Price action becomes self-reinforcing
- Cracks appear in the story
- Unwind begins—slowly at first, then all at once
We’re firmly in step 5. The question is how far it runs.
In my experience, these unwinds rarely stop at “fair value.” They overshoot, often dramatically, before finding a bottom.
Tactical Hedging: Cheaper and Smarter Alternatives
So what’s an investor to do? Panic sell everything? Hardly. But ignoring the risks isn’t wise either.
The good news: hedging has rarely been this asymmetric. S&P 500 puts are expensive relative to history, but there are smarter ways to protect.
One approach gaining traction: limited-loss structures on indices that exclude the mega-cap leaders. These hedges are outright cheaper than broad market protection, and they target the exact area where pain is concentrated.
Why pay up for S&P hedges when the real risk is in the other 493 names?
Exactly. The market’s armor—the Magnificent whatever-you-call-them—remains intact for now. But the rest of the market? Exposed.
Using defined-risk options on ex-mega cap indices lets you cap your downside while paying a fraction of the cost of broad market puts. It’s not sexy, but it’s effective.
Another angle: volatility targeting. As realized vol collapses—a side effect of momentum unwinds—systematic strategies reduce exposure automatically. That mechanical de-risking can provide built-in protection.
Positioning Tells the Story
Let’s talk crowded trades. Momentum has been the most overcrowded factor all year. CTA trend models? Max long. Risk parity? Levered up. Discretionary funds? Chasing performance.
That positioning extreme creates fragile equilibrium. Any shock—and we’ve had a few lately—can trigger cascading exits.
The COT reports, prime broker data, exchange flows—all pointing to the same conclusion: momentum exposure is at nosebleed levels historically.
When everyone is on one side of the boat, it doesn’t take much for it to tip. We’re seeing that tip in real time.
What Happens Next? Scenarios to Watch
Nobody has a crystal ball, but we can outline plausible paths.
Bear Case: Momentum drawdown accelerates into year-end. Tax loss selling amplifies moves. Broader market follows lower as leadership fails. Volatility spikes, forcing more de-risking.
Base Case: Choppy consolidation. Momentum stabilizes at lower levels. Market rotates into neglected areas—value, small caps, international. Breadth improves, but gains are grinding.
Bull Case: Quick washout. Dip buyers emerge. Momentum rebounds on any positive catalyst. The trade everyone loves to hate lives another day.
My money’s on the base case, but with a wary eye on the bear scenario. These unwinds have a way of surprising to the downside.
Lessons from Past Momentum Crashes
This isn’t the first momentum massacre, and it won’t be the last. Remember early 2000? The dot-com darlings that could do no wrong—until they did everything wrong.
Or 2009, when the “shovel sellers” during the financial crisis led the recovery, only to roll over hard once the easy money was made.
Each time, the pattern repeats: euphoria, extension, narrative cracks, unwind, overshoot, stabilization.
The difference now? Speed. Information travels faster, algos react instantly, and liquidity can vanish in heartbeat.
That compresses the timeline. What used to take months now unfolds in weeks—or days.
Protecting Your Portfolio Without Overreacting
Look, nobody wins by panicking. But nobody wins by pretending everything is fine either.
Smart risk management means having a plan before you need it. Some practical steps:
- Stress test your momentum exposure—it’s probably higher than you think
- Consider trimming winners that have detached from fundamentals
- Build cash as dry powder for better entry points
- Explore factor-neutral strategies to dampen volatility
- Use options judiciously for asymmetric protection
The goal isn’t to call the top or bottom. It’s to survive the volatility and participate when the dust settles.
I’ve been through enough of these cycles to know: the investors who overreact rarely come out ahead. But neither do those who bury their heads in the sand.
The Bigger Picture: Market Regimes Are Shifting
Zoom out for a second. What we’re witnessing isn’t just a momentum trade blowing up. It’s a regime change in market leadership.
The conditions that favored pure price chasers—low rates, concentrated growth, narrative-driven flows—are evolving. Inflation stickiness, geopolitical risks, policy uncertainty—they all point to a more balanced, volatile environment.
In such worlds, momentum tends to underperform. Factors like quality, value, and low volatility often take the lead.
Perhaps the most interesting aspect? These shifts create opportunities for patient investors. The names being discarded today could be tomorrow’s leaders—once the washout completes.
Timing that turn is impossible. But positioning for it? That’s where the edge lies.
So where does this leave us? Watching closely, managing risk actively, and remembering that every market massacre plants the seeds for the next opportunity.
The momentum trade had a hell of a run. Now it’s paying the piper. The question is: are you positioned to weather the storm, or will you be part of the debris?
In my book, preparation beats prediction every time. Stay vigilant, stay flexible, and remember—markets reward those who adapt, not those who fight the tape.
The unwind is here. How you navigate it will define your year.
