The YOLO strategy has backfired: traders' favorites are on track for their worst month in four years

The rapid sell-off of so-called momentum stocks—which had been posting significant gains until recently—has dealt a blow to retail traders, according to Bloomberg. The obsession with rapid growth has backfired: a basket of stocks that retail investors have been flocking to recently has fallen 13% and may end the current month with its worst performance in the past four years.

A basket of 50 stocks popular among retail investors—including online broker Robinhood Markets and chipmaker Marvell Technology—fell 13% in July and is on track to post its worst monthly performance since 2022. A similar basket of stocks from the Russell 1000 with the highest retail investor exposure, tracked by Jefferies, has lost more than a quarter of its value since June, according to Bloomberg.

Retail investors’ obsession with finding the next hot idea in the market is often associated with the acronym YOLO (you only live once). This strategy involves the desire to fulfill one’s desires and enjoy life right here and now, without delay; in the market, it entails buying the fastest-growing stocks and opening short positions on the biggest losers. In July—when the assets that had shown the strongest growth in previous months became some of the biggest underperformers—this tactic failed, according to Bloomberg. Since the beginning of the month, this trend-following strategy—YOLO or the momentum trade—has posted the worst results among the 11 quantitative strategies tracked by the agency. Bloomberg did not specify which other strategies YOLO was compared to.

“Semiconductor and AI equipment manufacturers, which have been the main drivers of this momentum, have long remained key assets in retail investors’ portfolios,” noted Viraj Patel, global macro strategist at Vanda Research. However, the sell-off of these assets in July—amid uncertainty regarding the return on large-scale investments in AI and the renewed escalation of the conflict in the Middle East—affected retail traders’ activity in the market.

According to Vanda Research, weekly net purchases of individual stocks by retail investors have fallen to their lowest level since the start of the COVID-19 pandemic, Bloomberg reports. Data from JPMorgan Securities also shows that inflows from retail investors for the week ending Wednesday, July 22, amounted to $5.7 billion, while the average weekly figure over the past 12 months was $6.8 billion, the agency notes.

At the sector level, technology-sector exchange-traded funds also saw a broad outflow of funds. Among the leaders in terms of capital outflows were semiconductor-focused funds such as the Direxion Daily Semiconductor Bull 3X Shares and the VanEck Semiconductor ETF.

“The slowdown in retail investor activity coincides with recent market jitters linked to the decline in so-called momentum stocks,” noted JPMorgan analyst Arun Jain. However, according to him, retail investors aren’t simply leaving the market; rather, they are becoming more selective in choosing stocks for their portfolios. Microsoft and Nvidia continue to attract significant buying interest, he says, noting that at the same time, giants such as Apple and Tesla have faced the strongest selling pressure.

Patel of Vanda Research agrees: “The inflow of funds from retail investors is becoming extremely uneven. Unlike last year, when the mantra was ‘buy anything related to AI,’ retail investors are now being very selective.”

A sell-off as part of a momentum trade strategy prompted a number of Wall Street investment banks to recommend that their clients buy stocks on the dip, according to Bloomberg. The decline has likely rid the market of most of its speculative excesses, which could have formed a price bottom, according to Michael Romano of UBS Securities.

On July 22, Bank of America’s trading desk also advised clients to buy U.S. momentum stocks, which had fallen more than 10% from their June highs last week. BofA believes the sell-off is nearing its end and presents a good entry point. BofA’s momentum portfolio currently includes, among others, stocks from companies such as SanDisk (up more than 500% year-to-date but down 22% over the past month), Micron Technology (down 11% over the past 30 days), and Advanced Micro Devices (up 2.5% over the past month).

Overall, during the middle of this week—from Tuesday through Thursday—Bank of America’s U.S. momentum stock index jumped 8.9%, marking its strongest gain since November 2024, according to Bloomberg. Meanwhile, UBS’s momentum indicator soared 11% over the same period, marking its largest three-day gain since 2022, the agency notes. “It’s been a real roller coaster ride for trend-following strategies—and, consequently, for retail investors,” Patel noted. “However, as soon as selling pressure eases and the lull on the buying side ends, the conditions for a significant rebound will become increasingly compelling.”

Meanwhile, JPMorgan CEO Jamie Dimon stated on July 21 that he would not buy long-term U.S. Treasury bonds at this time and does not consider the situation in the broader U.S. stock market favorable for taking positions. The banker added that he is considering the securities of individual companies and is not in favor of investing in the S&P 500 as a single asset.

This article was AI-translated and verified by a human editor