Not just tech: The big momentum trade could be in trouble

The dominant force behind the recent Nasdaq slip wasn't a tech tumble so much as it was a momentum moratorium. At least, that's what Pravit Chintawongvanich, head of derivatives strategy at Macro Risk Advisors, said Tuesday on CNBC's "Trading Nation."

Big tech stocks like Apple and Netflix certainly took it on the chin on Friday and Monday. And the Nasdaq 100 index, which is largely composed of a few large and strongly performing stocks, fell by 3 percent over the two sessions. But Chintawongvanich observed that the best-performing stocks have tumbled in a variety of sectors.

"This sell-off wasn't really about momentum. We did see these high-flying tech names this year take a hit, but really it wasn't just the big tech stocks. What we saw was that the best-performing stocks were actually the worst performers on Friday and Monday, and vice versa," Chintawongvanich said. "This was quite a smooth relationship."

On Friday, a Goldman Sachs report that may have contributed to the tech selling made the point that big tech stocks, growth stocks and momentum stocks have begun to enjoy a very tight relationship.

"While not exactly a Fields Medal worthy observation, we note that FAAMG [the group composed of Facebook, Apple, Amazon, Microsoft and Google parent Alphabet] is positively correlated with Growth and Momentum and this relationship has strengthened in recent months," the Goldman team led by Robert Boroujerdi wrote.

But just because the best-performing stocks are tumbling, it doesn't mean that "doom is coming," Chintawongvanich said.

"I think you may see a little more giveback in high-momentum names. That may take a little more time to take out. But generally, we've seen historically that when you've had these momentum unwinds, they don't necessarily mean bad things for the broader market."

In fact, to the extent that money is going into other stocks and sectors "it is healthy that you are seeing this rebalancing," Chintawongvanich said.

As the information technology sector dropped over the past week, financials and energy have gained ground. This "rebalancing" explains why the S&P 500 has remained relatively stable despite the significant drops in a few widely watched stocks.

So far this year, the iShares Momentum Factor ETF has nearly doubled the performance of the S&P 500.

Videos

Trades to Watch

Trader Bios

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more

Connect