The Sudden Unraveling of Wall Street’s Momentum Trade
Wall Street’s hottest momentum trade has reversed sharply, as former winners tumble and heavily shorted stocks surge.
3 min
Wall Street’s hottest trade has gone ice cold.
For years, it paid off to buy stocks that were rising in price—and bet against struggling shares. The momentum trade was especially profitable this year, as investors piled into hot stocks including Micron Technology, Nvidia, Advanced Micro Devices and other artificial-intelligence darlings while wagering against those likely to be hurt by the embrace of AI.
The S&P 500 Momentum Index soared 44% in the second quarter, its best quarterly performance on record, and it surged 133% over the past five years, nearly double the broad market’s performance.
Mega funds and rookie investors alike piled into the trade, some using leverage and options contracts in an effort to amplify their returns, propelling the underlying shares higher.
“It is a self-fulfilling prophecy,” said Matthew Tym, managing director at Cantor Fitzgerald, of the trade.
Suddenly, the trade is a loser. The momentum index has tumbled more than 9% since July 1, lagging behind the S&P 500’s 2.8% gain. The index—which tracks stocks in the S&P 500 based on a “momentum score”—is on track for the biggest quarterly underperformance in 25 years. July was the second-worst month for the momentum trade in around 40 years, according to Bank of America estimates; the only month worse was April 2009, in the teeth of the global financial crisis.
Hedge funds that bought momentum shares while shorting low-momentum stocks suffered even more. At the same time, a basket of the most popular stocks held by hedge funds tracked by Goldman Sachs recorded its biggest one-month underperformance in July relative to the S&P 500 in more than 20 years, according to the bank’s analysts.
Momentum trading is based on a rather simple observation: Investments that go up tend to keep outperforming; those that underperform often remain laggards. This kind of trading might seem too simple a stock-picking strategy to work. Yet it often has.
“For decades, it didn’t take a lot of sophistication to run a momentum strategy and make a decent living at it,” says Agustin Lebron, senior researcher at EquiLibre, a trading firm.
Part of the reason: It takes a while for corporate and other information to spread to various investors, so they slowly build positions, producing buying momentum.
“A huge pension fund can’t flip around its positions in a day,” says Lebron. “Behavioral biases also account for some of the effect, as well—people tend to sell their winners too early and hold losers too long.”
Fans of the strategy point to the human tendency to extrapolate from past results—and chase investment returns—noting that momentum patterns have been evident in markets for decades, even centuries. They also say that some of the worst months for momentum strategies are during longer periods of outperformance.
Some have been doing the trade by buying the strongest investments in a sector while shorting the weakest; others lean in to rising markets or asset classes. Still others use a quantitative approach or turn to banks or others who sell ways to make distinct wagers on momentum as a “tradable factor” or a “thematic basket.”
The fans remain believers. “Any strategy has disappointing periods,” says Antti Ilmanen, global co-head of the portfolio solutions group at AQR Capital Management.
The surge in Moderna and other biotech stocks helped crush the momentum trade. These shares were among the most heavily shorted in recent years, but positive news on a cancer vaccine from Moderna and Merck sent those stocks flying, crushing some quant and other hedge funds. Moderna is up around 150% so far this month.
These traders had an especially rough day on Aug. 19, which Goldman Sachs told its clients was the worst day for “systematic long-short managers” in more than two years. About half of the losses were because of momentum trades, the bank said.
Some traders have begun to short, or bet against, the very stocks that propelled the momentum trade earlier this year. Net short positions in futures tied to the Nasdaq-100 index among speculators recently climbed to some of the highest levels of the past two decades, according to data from the Commodity Futures Trading Commission.
The about-face is a sign of how markets have become more treacherous for investors, even as indexes keep climbing. Part of the issue: the recent meltdown of Situational Awareness, a hedge fund that had piled into some of the most popular momentum shares, including chip stocks. After a period of market tumult, Nvidia shares rocketed almost 9% after its earnings, showing how quickly sentiment can shift.
Some investors say the run-up in share prices driving tech stocks higher reminds them at times of the dot-com frenzy decades ago.
Mike Ogborne, the founder of San Francisco-based Ogborne Capital Management, said he has grown more cautious on technology stocks and is keeping more of his portfolio in cash than he typically does.
And he is nervous about the surge in spending by technology giants and quarterly capital expenditures that keep rising.
“It is a little bit like Cinderella and the clock striking midnight. You don’t know when midnight is going to come around,” Ogborne said. “They don’t send a memo around telling you when the capex cycle is over.”
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From start-up to harbourfront sanctuary, fashion entrepreneur Jane Lu’s home reflects ambition, discipline and a carefully built wealth strategy.
7 min
Coming home after a day in the office is a time of reckoning for Sydney businesswoman Jane Lu.
The 40-year-old founder of online fashion brand Showpo has built her empire to generate more than $100 million in annual revenue.
But unlocking her front door is a daily reminder of how far she has come in the cut-and-thrust of the business world.
One of the nation’s most iconic businesswomen, Jane, and her husband James Waldie, purchased the Birchgrove home in an off-market deal for $13.75 million in 2023.
The waterfront property in the inner west suburb of Birchgrove, near Sydney, captures breathtaking views of the Sydney Harbour Bridge.
With three bedrooms and three bathrooms, the double-storey house features a striking glass atrium, floor-to-ceiling windows, and double doors opening out to outdoor entertaining areas.
Bathed in natural light, the 1980s home was designed by architect Clark Walton.
The master bedroom features a walk-in robe, ensuite and private balcony.
The property also includes a deep waterfront pontoon, alfresco area and a sizeable boathouse used as an office. There is a double lock-up garage and manicured gardens.
“Living here feels like you own a piece of Sydney Harbour,” Jane tells Kanebridge Quarterly.
“It’s just such an iconic view. When I first bought this home and showed my parents, I was so proud.”
“When we moved to Australia we first lived in a one-bedroom unit in the same suburb, so this place reflects how far we’ve come in a relatively short space of time.”
It was the view that sealed the deal for Jane. The iconic Sydney Harbour Bridge sits perfectly framed in floor-to-ceiling windows, while the sun reflects on the silvery towers of the city’s skyscrapers.
“Living here feels like you own a piece of Sydney Harbour … it’s such an iconic view.”
“Sometimes I think it’s just crazy to be in this house. I’m very fortunate to be in this position,” she says.
Jane and her husband regularly work from home, interspersed with trips into Showpo’s inner-city headquarters. They catch water taxis from the pontoon at the front of the property, or launch their small tinny and head across to a nearby park for some leisure time.
With a background in banking and private equity, Waldie is the CFO and general manager of Showpo. It is the second home the couple have purchased together. They live there with their two children.
Birchgrove will always feel like home for Jane. While the home feels like her forever home, she hopes to renovate some aspects of it.
“We should renovate, but we’re procrastinating because it’s such a huge amount of work,” Jane says.
“We rebuilt the Showpo website last year, and we didn’t feel that we could do that and renovate at the same time.”
“But one day I would like to add my own wardrobe, a cinema room and a pool.”
“You work hard and you want your home to be somewhere to come back to and relax into and unwind. Home is more of a sanctuary for me these days.”
“Our home reminds me of my success. My younger self would be so proud. She would have only ever dreamed to be in a place like this.”
“We love the living room and the backyard area, which fronts onto the water. We love entertaining here with the backdrop of the Sydney Harbour.”
Affordable fashion
Offering global shopping, Showpo provides affordable fashion and accessories to young women. It is now a huge business, but it has been a slog.
Jane is open about quitting her job in corporate accounting to start a fashion business.
To launch Showpo, she lied to her parents, putting on a suit and pretending to go to work every day.
She shares that story in regular Instagram posts as inspirational fodder for others harbouring dreams of making it big.
Jane admits she did not love her time in the corporate world. “I really wanted to prove myself. I wanted to get out of a career that I hated, which was accounting.
“I also wanted to be able to take care of my parents, who sacrificed so much for me when they left everything back in China.”
She has also featured on the Australian Financial Review Young Rich List and appeared on Shark Tank as an investor, sometimes disagreeing with traditional business approaches taken by the other sharks.
She has rebranded herself as the Lazy CEO to highlight her focus on working smarter, not harder.
Regularly making headlines for her clever business prowess and success in business, Lu has cleverly established herself as relatable to the younger women who purchase from Showpo and respected by others in the business fraternity.
A big part of her success is her authentic and humorous approach to business and social media, which provides a glimpse into the glamorous life she’s built for herself through hard work and determination.
She doesn’t take herself too seriously, saying she believes that work should be fun and a place people want to come to every day.
Fashion empire
Jane is a cautious businesswoman who does not jump too early. During the early years of building her fashion empire, the couple rented a home in Darlinghurst, which she describes as more of a crash pad than home.
“At the time, we were busy working and had other priorities,” she says.
“The business was growing and we were young, so the home was part of the chaos. It was messy and small, but it didn’t matter.”
By delaying home ownership, she was able to prioritise liquidity, giving her the flexibility to take risks and move quickly as business opportunities arose during Showpo’s early years. At the time, she was trying to dig out of $60,000 debt.
“The thing that I have carried with me throughout the journey is to always have a bias for action. Always focus on momentum over perfection and just test, iterate and repeat,” she says.
“In business, things aren’t perfect, but just keep going and learn as you go, don’t wait until you’re ready, and mistakes are okay, they’re just valuable lessons.”
“When you’re in business, if you’re not making enough mistakes and you’re not failing enough and doing things differently, then you’ll just blend into the rest of the market and won’t stand out.”
Jane is ambitious about achieving more growth in the business she launched in 2010.
“I’ve had the business 16 years, and it’s been a bit of a roller coaster,” she says.
“There has definitely been tough times, but it’s about understanding that’s okay.
“Success isn’t about avoiding the blows it’s about building the grip to climb out of them.”
But it hasn’t always been smooth sailing. In 2010, Jane was drowning in debt and unhappy in her accounting job.
She had attempted to start a business running pop-up stores selling products from emerging designers, but it eventually folded, leaving her jobless and broke.
With a background in corporate accounting, Jane knows that superannuation offers compound interest.
“I treat super as a long-term wealth vehicle as opposed to an after-thought,” Jane says.
“It would be one of the most tax effective structures in Australia and ignoring it would be financially lazy because once you set things in place, then it compounds.”
“I see super as part of a broader wealth strategy, but you have to be disciplined with it. While not exciting, it can be very impactful over time.”
Given her financial exposure as the founder of a fashion business, Jane focuses on diversification.
“Even though I’m over-indexed in the equity of owning my own business, I’ve got some smaller business investments.”
“I believe success comes from time in the market and allowing that to compound over time,” she says.
But success for Jane is not about wealth and what you can buy.
“Life is about the memories and experiences along the way. Now I’m a mother, it’s about the flexibility to be able to spend time with my family and having freedom, leave and the alignment to become who I am while building the business. That means so much to me.”
Jane admits she does not have time to be a particularly big spender. “I don’t really care for material things. I’m not materialistic. Even now, I could afford designer bags, but I don’t have the time to research it and I don’t care enough about it to research what I want. I rarely have anything to really save for in that respect.
“Because entrepreneurship is so volatile, my personal finances are structured to be more stable.”
“I always keep liquidity, because cash is the bloodline of the business. I don’t over-invest, preferring to keep cash on hand.”
Jane would advise her younger self to keep investing in herself.
“I’d make sure that I invested in learning, invested in taking risks and being okay with those mistakes, and invested in creating memories and experiences. What’s also worked for me is that I’ve also married someone who is more risk averse than me so he can mitigate my chaos.”
Founded in 2010, the business was initially called Show Pony, but the name was changed to Showpo as it was already owned by an American business.
Today, Showpo is a $100m-plus fashion powerhouse known around the world for bringing affordable fashion to the market.
Jane says her social media handle, The Lazy CEO, captures who she is. She’s proud of that title, which American billionaire businessman and philanthropist Bill Gates once said: “I choose a lazy person to do a hard job. Because a lazy person will find an easy way to do it.”
This article appeared in the Winter 26 issue of Kanebridge Quarterly, which you can buy here.
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