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Analysts Spot Buying Opportunity in Momentum Stock Selloff
21 Aug
Summary
- Momentum stocks suffer steep 13% drop in 2 weeks
- Goldman traders see chance to profit from rebound
- Nvidia earnings next week could drive further AI selloff
According to a report from Goldman Sachs, the recent steep losses in high-flying momentum stocks may actually signal a buying opportunity for investors. The firm's trading desk has observed that when its High Beta Momentum basket has dropped 10% or more over a five-day span in the past, it has proceeded to rise in the following week 80% of the time, with a median return of 4.5% in the next week and over 11% in the next month.
The sudden unwind in the momentum strategy, which focuses on buying recent winners and selling short those that are lagging behind, was initially driven by a rally in the basket's short positions. However, the declines this week were powered more by losses in the long leg of the basket, as themes like AI felt the pain of the market rotation.
Looking ahead, the traders note that the momentum basket is now trading near oversold territory and approaching the bottom of its regression channel, which could serve as a major support level. However, they caution that upcoming tech earnings, particularly Nvidia's results on August 27th, could drive a prolonged selloff in AI-related stocks and further pressure the momentum trade.
