July featured a sharp momentum reversal, perhaps best illustrated by Leopold Aschenbrenner's hedge fund Situational Awareness. The fund reportedly grew from $225 million to $45 billion in less than two years. Last month, its largest long positions Nebius, SanDisk, Micron, and CoreWeave declined between 18% and 47%, while its software shorts moved against it. The one-two punch forced the fund to unwind most of its public equity portfolio amid heavy losses and mounting margin pressure.
The July momentum crash was not triggered by a single macro event. Several catalysts, including the release of Kimi K3, helped spark the selloff. The primary driver, however, was a broad deleveraging and rebalancing after the AI and momentum trades became extremely crowded.
(Read here for more on momentum and how Burney implements the factor.)
Momentum crashes are typically driven by a violent rebound in previously weak (bearish) momentum stocks. What was somewhat unusual about July's episode was that, by some of the measures we track, both sides of the trade moved sharply: momentum winners sold off while momentum losers rallied, making it particularly painful for funds betting on both sides, such as Situational Awareness. (Citadel injected capital into the fund and reportedly generated an immediate profit from the investment in August)
The fact that the bull side joined the selloff also confirms that the primary culprit this time was an overextended bull run.
Despite the magnitude of July's dramatic momentum crash, the pattern itself is not unusual and in fact typical: when momentum builds up a lot, it gives some back. From here, however, the market's path remains open. It could enter a period of consolidation, or it could resume its advance and reach new highs.
We see several constructive signs:
1. Corporate earnings remain supportive through 2026 and 2027.Risks remain: