Momentum Whiplash: Where Should Investors Pivot Next?

The momentum trade just hit a wall and the unwind has been nothing short of brutal.

JPMorgan analysts Dubravko Lakos-Bujas, Arun Jain and Bhupinder Singh note that the sharp reversal in momentum has erased two years of gains in just three weeks – one of the fastest unwinds in four decades.

With mega-caps leading the drop and a dramatic shift towards low-volatility stocks, investors need to rethink their strategies.

What’s Behind The Crash?

Extreme crowding in momentum stocks – primarily fueled by AI enthusiasm, high-rate expectations and pro-growth bets—came under pressure as macro risks resurfaced.

The result? A 17% average decline among the Mag-7, triggering a $5.8 trillion market cap wipeout in the S&P 500.

While forced liquidations and systematic deleveraging have cooled the immediate risk of another crash, JPMorgan warns that if this is a true regime shift, the unwind may only be one-third complete.

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Where Is Momentum Flowing?

Momentum is rotating away from quality growth and into low volatility and defensive plays.

According to JPMorgan, stocks in the following sectors are seeing the strongest bid:

Utilities: NiSource Inc NI, Ameren Corp AEE and Evergy Inc EVRG

Insurance: Arthur J. Gallagher & Co. AJG, Brown & Brown Inc BRO and Aon PLC AON

Financial Services: Visa Inc V and Mastercard Inc MA

Crowding in low volatility names has surged, pushing relative P/E valuations to record highs.

What To Watch Next

The Low-Volatility Boom

With the iShares Russell 2000 ETF IWM (small caps) lagging and defensive ETFs like the Invesco S&P 500 Low Volatility ETF SPLV seeing inflows, the shift towards safety is clear. But JPMorgan warns that a further rate drop could push low volatility stocks into bubble territory, much like 2016.

High-Volatility Bargains

According to JPMorgan, stocks that have seen heavy multiple compression, making them attractive for value-seeking investors, include:

Semiconductors: Monolithic Power Systems Inc MPWR, Nvidia Corp NVDA and Advanced Micro Devices Inc AMD)

Software: (Synopsys Inc SNPS, Cadence Design Systems Inc CDNS, ServiceNow Inc NOW)

Tech Hardware: (Arista Networks Inc ANET, NetApp Inc NTAP, Dell Technologies Inc DELL)

However, without an intra-cycle reset or Fed pivot, a broad move into beaten-down growth stocks may be premature.

The Fed’s Next Move

If rate expectations shift lower, expect bond proxies to gain further. If not, the defensive rally may stall, forcing a reassessment of positioning.

Momentum traders just got whipsawed and the rotation into low-volatility stocks has been rapid. While some safety plays look solid, overheating risks remain.

Investors should watch for signs of a structural shift – and be ready to pivot before the next wave hits.

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