Mizuho’s note points to a technical breakdown with real teeth, since momentum baskets slipping below the lows set during July’s Situational Awareness unwind (Mizuho referring to Morgan Stanley’s Tech Momentum Index) means the market has now erased the entire rebound that followed that earlier liquidation event. The self-reinforcing dynamic Mizuho describes, where falling prices trigger further systematic de-risking, is the same mechanism that made the July move so violent, and it tends to accelerate once key technical levels give way. This latest leg lower is unfolding against a backdrop of rising bond yields and oil prices tied to the escalating US Iran conflict, adding a macro overlay to what started as a positioning and factor unwind. The read-through for equity markets broadly is that high beta and momentum exposed names remain vulnerable to further forced selling until systematic positioning resets to a level funds are comfortable holding.
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Ugly Tuesday:
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The momentum trade just gave back its entire summer recovery, and Mizuho says the selling is now feeding on itself.
Summary:
- Mizuho says momentum baskets have completely round tripped, erasing the rebound seen since July
- The baskets have broken below the lows reached during the Situational Awareness fund unwind
- Mizuho describes the move as increasingly self-fulfilling, with systematic strategies de-risking and forcing further selling
- The renewed weakness comes as broader markets sell off on rising bond yields and oil prices tied to escalating US Iran tensions
- Tech and high beta names have led losses in the latest session, with chip stocks particularly hard hit
- The pattern echoes July’s momentum liquidation, when the Goldman Sachs high beta momentum basket suffered its worst month since 2000 following the collapse of the Situational Awareness hedge fund
Momentum focused equity baskets have broken below the lows set during July’s chaotic unwind, according to a note from Mizuho, effectively erasing the rebound that followed one of the sharpest factor liquidations markets have seen in years. The bank’s strategists describe the move as increasingly self-fulfilling, with systematic strategies de-risking in response to the falling prices and, in doing so, forcing further selling into an already fragile market.
The reference point matters. In July, the collapse of the heavily leveraged Situational Awareness hedge fund triggered margin calls and forced liquidation across momentum exposed names, contributing to the Goldman Sachs High Beta Momentum basket’s worst monthly performance since 2000. That episode wiped out tens of billions of dollars in value before a multi-strategy fund stepped in to absorb the remaining portfolio at a discount, which helped stabilise the selling at the time. Markets subsequently recovered much of that lost ground through August, with momentum names staging a partial comeback.
Mizuho’s note suggests that recovery has now been fully unwound, with baskets not just retesting but breaking through their July lows. The mechanism the bank describes, where price weakness prompts systematic funds to cut exposure, which in turn deepens the price weakness, is the same feedback loop that made the original July liquidation so disorderly. Once key technical levels are breached, that kind of positioning driven selling can accelerate quickly, independent of any fresh fundamental catalyst.
This latest leg lower is unfolding alongside a broader risk off move tied to the escalating conflict between the United States and Iran, with rising oil prices and bond yields weighing on equities more generally. Technology and high beta stocks, including chip names, have led the recent declines, consistent with the sectors most exposed to momentum and systematic positioning. Whether this round of deleveraging proves as short lived as July’s remains to be seen, but Mizuho’s framing suggests the risk is that systematic selling continues to feed on itself until positioning resets to a level funds are willing to hold through the current bout of geopolitical uncertainty.
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I’m unable to access the index Mizuho refer to, it’s a proprietary index constructed in house at Morgan Stanley. The closest I can get is iShares MSCI USA Momentum Factor ETF as a proxy. Its not through its July lows yet.
This article was written by Eamonn Sheridan at investinglive.com.