Retail Traders' Momentum Bets Suffer Worst Month Since 2022

The momentum trade, a strategy built on the principle of buying stocks that are rising the fastest and shorting the biggest decliners, is experiencing its worst performance in years—and retail traders, who have embraced the YOLO (you only live once) mentality tied to this approach, are taking the heaviest losses. A basket of 50 stocks favored by amateur investors, which includes Robinhood Markets Inc. and Marvell Technology Inc., is on track for the worst month since 2022. A Jefferies basket of Russell 1000 firms with the highest retail participation has lost more than a quarter of its value since June.

The core problem is concentration. Retail traders have made semiconductor and AI hardware stocks the foundation of their momentum portfolios, betting that these sectors would continue climbing. According to Viraj Patel, global macro strategist at Vanda Research, these semis and AI hardware names have been the primary driver of momentum and have been longstanding names in retail portfolios. But that very concentration has become dangerous as the entire thesis supporting the trade begins to unravel.

Multiple factors are triggering the selloff simultaneously. Most significantly, uncertainty about returns from massive AI investments has prompted hedge funds to unwind their tech positions at a record pace. Beyond that, renewed geopolitical tension involving Iran and renewed questions about the Federal Reserve's interest-rate path have soured investor appetite for a trade that had become dangerously crowded. The momentum strategy, which was the market's best performer not long ago, is now the worst performer among 11 quant factors tracked by Bloomberg so far in July.

The fallout extends beyond individual stock losses. Weekly rolling net buying of individual stocks has collapsed to the lowest level since the Covid-19 pandemic, according to Vanda Research, signaling that retail traders are withdrawing from the market altogether. JPMorgan Securities data show retail flows totaled $5.7 billion（約9100億円） in the week through Wednesday, falling below the 12-month weekly average of $6.8 billion（約1.1兆円）. At the sector level, technology exchange-traded funds have suffered broad-based outflows, with the Direxion Daily Semiconductor Bull 3X Shares (ticker: SOXL) and the VanEck Semiconductor ETF (ticker: SMH) experiencing selling pressure 1.6 standard deviations above the mean—unusually heavy exits. As JPMorgan's Arun Jain noted, this slowdown in retail engagement aligns with the recent market nervousness around the momentum drawdown.

The momentum trade, long a favorite of retail investors betting on the next big market trend, has collided with a broader reassessment of the AI investment boom. Retail traders concentrated their portfolios in semiconductor and AI hardware stocks—names like Robinhood Markets and Marvell Technology—precisely because these sectors drove momentum gains through much of the bull run. However, the strategy's crowding and heavy concentration in a single theme has now become its vulnerability.

The pullback reflects multiple converging pressures: hedge funds are unwinding tech positions at a record pace as questions mount about whether the enormous capital invested in AI will deliver returns, geopolitical tension has reignited, and the Federal Reserve's rate path remains uncertain. Together, these factors have turned momentum from a market darling into its worst performer among 11 quant strategies tracked by Bloomberg in July. The impact has been acute enough to push retail participation in stock buying to pandemic-era lows, suggesting that amateur investors are either capitulating or retreating to the sidelines.

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