Inside Markets — Momentum Unwind

Friday’s -1.7% sell off in the SPX was the worst day since December 18 but still left the index up +2.2% on the year, above all moving averages and only ~2% below its all-time high. Crowded names sold off most, which has the look and feel of a momentum factor unwind that generally occurs 2-3 times in any given year with most ending up as buying opportunities. The buying opportunity scenario requires that implied equity volatility (VIX) remains at benign levels below ~22. Positioning indicators suggest the momentum factor unwind is largely complete, but the most crowded names remain crowded and at risk of underperforming.

Friday’s sell off wasn’t preceded by bearish momentum divergence signals, which leads us to believe the pullback is more likely to be a buying opportunity than the start of something bigger. However the SPX is still in short-term overbought territory after struggling at the 6119 peak with technical support in the 5780-5870 range – the midpoint suggests another ~3% downside from current levels.

The bullish case for equities requires that US growth remains resilient, the inflation impulse remains muted and tariff announcements don’t escalate/damage corporate sentiment. The combination should keep the Fed in a dovish position with earnings revisions biased higher. Inflation will be in focus this week with Friday’s February core PCE print as the next major catalyst for markets.