Time to Buy the Dip in Momentum Stocks After a Punishing July Drawdown? Here's What History Tells Us.

Investors who can stomach a little short-term volatility are often rewarded

Is it time to buy the dip in momentum stocks?

A powerful momentum trade that had swept up shares of semiconductor names and other artificial-intelligence infrastructure plays has hit the rocks over the past month.

But if history is any guide, investors with the temerity to buy back in might be rewarded - as long as they have the stomach to sit out some more volatility in the short term.

"If you want that long-term exposure, now is an excellent time. But in the very short term, it could be turbulent," said Travis Prentice, chief investment officer and portfolio manager at the Informed Momentum Company.

After rising more than 44% during the second quarter - its strongest quarterly performance on record - the S&P 500 Momentum Index slipped into correction territory late last week, according to Dow Jones Market Data. Since its record close on June 22, the momentum index had fallen by 10.6% as of Monday's close.

The momentum factor is known for big drawdowns that tend to play out rather quickly.

Dow Jones Market Data looked at the past 10 instances where the Invesco S&P 500 Momentum ETF SPMO fell into correction territory - defined as a drop of 10% or more from a recent high. The exchange-traded fund aims to track the S&P 500 momentum index.

Over the three months that followed the past 10 corrections, the SPMO ETF rose 12.4% on average. One year later, average returns were more than 24%. Forward returns were overwhelmingly positive, with win rates at roughly 90%.

SPMO ETF performance following a 10% decline

 
Start of correction                     3 months later  6 months later  12 months later 
2/5/2016                                7.64            15.52           15.89 
10/24/2018                              1.35            10.11           12.97 
12/17/2018                              14.05           18.57           22.40 
2/27/2020                               4.64            25.87           30.31 
3/23/2020                               41.23           52.83           68.47 
3/4/2021                                10.70           27.74           15.66 
1/25/2022                               -1.27           -8.75           -4.47 
4/29/2022                               0.15            2.36            0.32 
9/23/2022                               12.03           2.98            13.31 
3/10/2023                               4.08            11.76           49.23 
8/2/2024                                11.22           21.70           37.75 
3/10/2025                               16.27           29.74           29.28 
3/26/2026                               38.49 
Average                                 12.35           17.54           24.26 
Median                                  10.70           17.04           19.15 
% Higher                                92.3%           91.7%           91.7% 
Source: Dow Jones Market Data; FactSet 

The data suggest this momentum selloff could have a bit more room to run. The average maximum drawdown for the ETF over the past 10 corrections was about 15%, Dow Jones Market Data showed.

Several investment banks maintain their own momentum baskets, some of which incorporate both long and short positions. One example, a high-beta momentum basket created by Goldman Sachs, has fallen by more than 30% from its peak.

A team of analysts at Bespoke Investment Group added more context to the latest momentum drawdown in commentary shared with MarketWatch. The 47 stocks in the Russell 1000 Index RUI that had gained 100% or more during the first half of 2026 were recently down, on average, 21.6% since the start of July.

Meanwhile, 17 stocks that were down by 50% or more during the first half have bounced by 10.6%. That speaks to the rotation trade that has gripped the U.S. equity market over the past few weeks. As highflying semiconductor names and other AI-related stocks have struggled, shares of energy stocks, retailers and banks have been trending higher.

Depending on how individual momentum models are calibrated, the constitution of stocks comprising the momentum factor could start to change as soon as early next month, said Melissa Brown, global head of investment-decision research at SimCorp.

"Momentum drawdowns tend to be big, but they don't tend to last a very long time, because eventually, the stocks with good momentum change," Brown told MarketWatch.

For most of the major momentum-tracking ETFs, rebalances happen fairly infrequently - the Invesco S&P 500 Momentum ETF rebalances semi-annually, while the iShares Edge MSCI USA Momentum Factor ETF MTUM rebalances quarterly, according to prospectus documents.

Ken Jimenez contributed.

-Joseph Adinolfi

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(END) Dow Jones Newswires

July 21, 2026 09:25 ET (13:25 GMT)

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