The Momentum Bubble Is Starting to Crack

The momentum factor, currently driven by AI-related stocks, is showing signs of exhaustion as hedge fund positioning and leverage reach historical peaks. Parallels to previous bubble years and a recent pullback in Asia suggest high risk for the broader market.

Key Takeaways

• 1.The current Momentum factor rally is heavily concentrated in the AI trade, specifically Semiconductors, Tech Hardware, and Capital Goods.
• 2.Hedge fund positioning and long leverage have reached historical highs, creating a crowded setup similar to 1998, 1999, and 2021.
• 3.Historical data shows that 3-month momentum rallies exceeding 20% are typically followed by a decline over the subsequent two to three months.

Table of Contents

• In the danger zone
• At highs
• Normal trajectory
• Not a good sign for the overall market
• Pullbacks do happen
• More on the risks
• It has already started
• It is an AI trade

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