"YOLO" retail investors got trapped! Momentum factor sees largest drawdown in four years, hottest group stocks evaporate 25% in a month.

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The rapid collapse of momentum trading is hitting its most loyal followers—retail investors—hard.

The basket tracking stocks most favored by retail investors has posted its worst monthly decline since 2022, and the Russell 1000 high retail participation basket compiled by Jefferies has dropped more than 25% since June.

Among eleven quantitative factors tracked by Bloomberg, the momentum factor performed the worst in July, becoming the most severely impacted strategy in this round of market adjustment. The iconic retail "YOLO" (you only live once) style of chasing gains has faced a direct blow this month.

Multiple negative factors combined are the main reason for this momentum trading collapse: Doubts about huge investment returns from artificial intelligence have prompted hedge funds to unwind tech positions at record speed, the renewed Iran situation, and uncertainty over the Fed’s interest rate path have further dampened this already overcrowded trade. Retail investor participation has cooled noticeably—Vanda Research data shows weekly rolling net buying of individual stocks has dropped to its lowest level since the pandemic.

Momentum Factor Sees Biggest Drawdown in Four Years, Retail Investors Bear the Brunt

This month’s momentum trading rout has dealt a particularly direct hit to retail investors.

Retail favorites like Robinhood Markets and Marvell are among them. This basket’s monthly drop is the largest since 2022.

Vanda Research global macro strategist Viraj Patel pointed out, "Semiconductor and AI hardware stocks have long been the main driving force of momentum strategies, and these names have been staples in retail investor portfolios." This highly concentrated holding structure means momentum drawdowns hit retail investors much harder than other groups.

Multiple Negative Factors Combine, Crowded Trades Are Rapidly Unwinding

This momentum collapse was not caused by any single factor.

According to Bloomberg, doubts about AI investment returns first triggered hedge funds to cut tech positions at record pace; then renewed tensions in Iran and market concerns over the Fed’s interest rate trajectory further eroded investor confidence in this crowded trade.

At the sector level, tech ETFs have faced large-scale outflows.

Retail Participation Drops to Lowest Since Pandemic, But No Full Retreat

Retail investor activity has noticeably contracted amidst this shock.

Vanda Research data shows weekly rolling net buying of individual stocks has dropped to its lowest since the pandemic. Data from J.P. Morgan shows total retail inflows for the week ending Wednesday were $5.7 billion, below the 12-month weekly average of $6.8 billion.

J.P. Morgan’s Arun Jain wrote in a report, "The slowdown in retail participation closely matches the recent market tension around the momentum drawdown."

However, J.P. Morgan data also shows retail investors have not fled completely, but are becoming more selective.

Microsoft and Nvidia continue to attract substantial net buying, while Apple and Tesla face the most selling pressure. Patel said, "Retail money flows are becoming very dispersed. Unlike last year's 'buy everything AI' logic, retail stock selection is now much more cautious."

Wall Street Recommends Buying the Dip, Strong Momentum Rebound Signals Appear

The rapid decline has prompted multiple Wall Street trading desks to advise clients to buy on the dip.

UBS Securities’ Michael Romano wrote in a client note that this selloff may have digested most of the speculative bubble and may have set a price bottom. BofA’s trading desk urged clients to buy U.S. momentum stocks, believing that after a round of profit taking, the sector is now in an attractive entry window.

Recent data shows rebound signals have appeared. BofA’s U.S. momentum stock basket rose 8.9% over the past three trading days, the biggest three-day gain since November 2024; UBS's momentum indicator soared 11%, marking the largest three-day gain since 2022.

Patel said, "Momentum trading—and retail investors—have experienced a roller-coaster ride. But once selling pressure fades and buyers return, conditions for a meaningful rebound will become increasingly favorable."

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