MW Beneath the hood, stocks just suffered their worst day of the year. Some are worried.

By Steve Goldstein

A Goldman Sachs index of momentum stocks fell by over 6% on Monday

Monday saw a 0.6% decline in the S&P 500, which doesn't sound like anything to get excited about given the index is still up 27% on the year.

But actually, it was a historic day in one sense - momentum stocks plunged. Momentum refers to the idea that stocks that have done well will continue to do so. The winners will be winners, and the losers will be losers, a strategy that essentially outsources any investment analysis to the rest of the market, but one that has done exceedingly well this year - better, in fact, than any other investment factor. Momentum plays of late would be companies like MicroStrategy $(MSTR.AU)$, AppLovin (APP), Palantir Technologies $(PLTR)$ and Nvidia $(NVDA)$.

Goldman Sachs has what it calls the "high beta momentum long/short index," and on Monday that grouping tumbled 6.1%, its worst daily performance since Feb. 2023. Morgan Stanley has its own momentum long index, which fell 4.4%; Bloomberg's 'pure momentum' factor suffered its worst day in two years. The definitions slightly vary but all agreed that momo, as it's called, was a mess.

What should you do now? Goldman Sachs examined five-day drawdowns in momentum over the last decade - the hit rates were impressive from the short term all the way out to one year, with an average gain of 10% over one year. "Momentum dips are worth buying," said Anton Tran, a trader at Goldman Sachs.

Well, maybe. Jonathan Krinsky, a technical analyst at BTIG, singled out instances the daily momentum index slumped at least 4% when it was within 1% of a 52-week high. On that measure, actually there are some notable and rather ominous post-drawdown experiences, he said.

Krinsky also pointed out the S&P 500 SPX just completed a six-day stretch of gains with more stocks declining than advancing every day. While the S&P 500 gained 0.3% over that period, in other six-day stretches with more losers than winners it usually falls, by 6.6% on average. "When you add that to the fact that last week saw NYSE breadth negative every day with the [S&P 500] higher, the odds of a volatility event before year end are growing," he says.

Kevin Muir, a former trader who writes the Macro Tourist blog, says options dealers are pinning the market for now, but he agrees that the underlying stock price action is becoming more erratic. "Once we get through year-end, the gamma bid will disappear and risks will rise considerably," he said, using the terminology for dealers who have positions that benefit from markets being stable. "Prepare accordingly."

The markets

U.S. stock futures (ES00) (NQ00) were steady in a session that may be quiet as traders wait for the consumer price index due Wednesday.

   Key asset performance                                                Last       5d      1m      YTD     1y 
   S&P 500                                                              6052.85    0.09%   0.86%   26.90%  30.94% 
   Nasdaq Composite                                                     19,736.69  1.71%   2.27%   31.48%  36.75% 
   10-year Treasury                                                     4.215      -1.30   -22.50  33.41   1.15 
   Gold                                                                 2685.3     0.88%   2.25%   29.61%  34.43% 
   Oil                                                                  68.06      -0.16%  -0.13%  -4.58%  -4.68% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

Software giant Oracle $(ORCL)$ late Monday reported earnings and revenue that were close to analyst expectations.

C3.ai (AI) topped sales growth expectations as the enterprise-software company expanded an alliance with Microsoft.

Another AI play, MongoDB $(MDB)$, lifted its full-year outlook.

Toll Brothers $(TOL)$, the home builder, reported earnings ahead of expectations and said it's seen strong demand over the last six weeks.

GE Vernova $(GEV)$, up 155% since being spun off, is holding an investor day after the close.

Also coming after the close: results from GameStop $(GME)$, the original meme stock. Its stock has dropped by a double-digit percentage following each of the last three quarterly results, according to FactSet.

Best of the web

The secrets of the man who made Nvidia the world's most valuable company.

Drugs like Ozempic could justify a Mondelez acquisition of Hershey.

Wall Street's complex debt bonanza hits fastest pace since 2007.

Top tickers

Here were the most active stock-market tickers as of 6 a.m. Eastern.

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   GME     GameStop 
   PLTR    Palantir Technologies 
   TSM     Taiwan Semiconductor Manufacturing 
   NIO     Nio 
   AMZN    Amazon.com 
   MSTR    MicroStrategy 
   AAPL    Apple 
   SMCI    Super Micro Computer 

Random reads

The true face of Cleopatra may have been found.

Archeologists also have discovered the oldest gun ever found in America.

A Frenchman is joining a famous boat race - on dry land.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.

Check out On Watch by MarketWatch, a weekly podcast about the financial news we're all watching - and how that's affecting the economy and your wallet. MarketWatch's Jeremy Owens trains his eye on what's driving markets and offers insights that will help you make more informed money decisions. Subscribe on Spotify and Apple.

-Steve Goldstein

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

December 10, 2024 06:22 ET (11:22 GMT)

Copyright (c) 2024 Dow Jones & Company, Inc.