Momentum factor positioning remains vulnerable to further unwinding despite recent deleveraging, as gross leverage in high-momentum stocks is still elevated on a two-year basis
Too little corroboration in the last 3 days to call a trend (2 articles). Watching for it to gain traction.
Gross leverage in high-momentum stocks has declined but remains elevated relative to a two-year baseline, leaving the factor exposed to additional forced selling. Momentum volatility is described as running hotter than dot-com era levels, pressuring hedge funds operating under VAR constraints and retail traders who entered on breakout strategies.
When momentum positioning unwinds, it tends to be self-reinforcing — forced deleveraging by VAR-constrained funds creates price dislocations that trigger further stop-outs, amplifying volatility well beyond what fundamentals alone would justify and pulling down broad market indices in the process.
"While gross leverage in high-momentum stocks has dropped, it remains elevated on a two-year basis, 'leaving positioning still vulnerable to further unwind,' according to a note from UBS Systematic Advisory last Thursday."
"Momentum volatility, now running hotter than the dot-com era, is flushing out hedge funds with VAR limits and retail traders chasing breakouts."