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Wall Street has just experienced one of the most severe momentum stock crashes in history. While tech stocks have briefly stabilized after a series of heavy losses, market participants remain deeply divided on whether this rebound can be sustained. Several technical analysts caution that the risk-clearing process may not yet be complete.
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BTIG's Chief Market Technical Strategist, Jonathan Krinsky, states that while US tech stocks have entered oversold territory, presenting room for a technical bounce, investors should not rush to buy the dip. He notes that the Morgan Stanley Industry Neutral Momentum Index has plummeted 17.4% over the past four trading sessions, marking its largest recorded decline—surpassing the corrections seen during the dot-com bubble burst, the 2022 bear market, and the post-COVID-19 shock.
Simultaneously, the continued rise in long-end US Treasury yields is adding pressure to growth stocks. The 30-year bond yield briefly hit 5.246% on Wednesday, a level not seen since 2007, further suppressing high-valuation tech stocks.
The rapid shift in market sentiment has caught investors off guard. The Philadelphia Semiconductor Index fell 5.3% in a single day on Wednesday, its steepest drop since early July. The Nasdaq Composite Index closed lower for the sixth consecutive session, its longest losing streak since April 2024, and briefly approached a technical correction zone, sitting 10% below its June 2 peak.
Momentum Trading Faces Unprecedented Liquidation
The intensity of the current tech sell-off is historically rare.
Krinsky points out that Goldman Sachs' High Beta Momentum Pairing Index—a strategy that buys strong stocks and shorts weak ones—has fallen 23% below its 200-day moving average. In mid-June, this index was trading 40% above that same average.
High-beta stocks, characterized by greater volatility, also carry higher risk and potential returns. During this correction, they have become the primary target for capital outflows, reflecting a market repricing of the artificial intelligence infrastructure investment boom.
Despite this, the semiconductor sector remains a significant leader for the year. So far, the Philadelphia Semiconductor Index has gained roughly 45%, significantly outpacing the Nasdaq Composite's approximately 5% rise. However, the gap between these gains is rapidly narrowing due to the recent sharp correction.
Tech Rally May Be a "False Breakout"
Krinsky believes that, in the short term, tech stocks have the conditions for a rebound. However, historical patterns suggest that an oversold bounce does not necessarily signal a trend reversal.
He cites the market behavior following the 2000 dot-com bubble burst as an example. The Philadelphia Semiconductor Index, after crashing 35% in one month, quickly rebounded 37% before falling back into a downtrend.
"We cannot be sure if a similar-sized rebound will occur this time, but even if the semiconductor index rises 20%, it would only mean returning to near its 50-day moving average. We believe that level could face renewed resistance, potentially leading to a test of the 200-day moving average," Krinsky said.
He further warns that if the market's judgment on this momentum stock rebound is flawed, the risk could escalate into a "broad correlation sell-off" similar to August 2024. In such a scenario, stocks, bonds, and other asset classes would come under pressure simultaneously, making it difficult for even equal-weight strategies to avoid the impact.
High Interest Rates Remain the Biggest Challenge for Tech Stocks
The persistent rise in long-end interest rates is a key factor pressuring tech stock valuations.
Krinsky states that the uptrend in the 30-year Treasury yield "continues to threaten the breakout trend markets have formed over the years." Any further increase could act as a headwind for the recent rebound in strong stocks.
High interest rates create a dual challenge for tech stocks. On one hand, tech company valuations are heavily dependent on discounting future cash flows, and rising rates directly lower these valuations. On the other hand, increased financing costs fuel market concern about whether the returns on massive AI capital expenditures by large tech firms will materialize.
Meanwhile, market sentiment indicators also show a shift in risk appetite. Callum Thomas, head of research at Topdowncharts, notes that the trading ratio of leveraged long-to-short US equity ETFs has risen to its highest level since the 2021 fiscal stimulus period. Historically, when this indicator hits extreme levels, it often corresponds with a short-term market top.
"Now, the burden of proof rests more heavily on the bulls. Caution is likely the most prudent choice for the market right now," Thomas said.
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