U.S. tech momentum stocks saw the largest single-day increase in history, but has the plunge come to an end?

Author: Long Yue

U.S. tech momentum stocks staged a sharp rebound on Tuesday (July 21). Morgan Stanley's TMT momentum factor rose over 12% in a single day, marking the largest single-day gain on record, even surpassing any single-day performance during the 2000 internet bubble. Goldman Sachs' high beta momentum long index (GSCBHMOM) increased by about 8.5% in a single day, the strongest single-day performance since April 2025; the long-short high beta momentum index (GSPRHIMO) surged by 9.5%, the strongest since 2021, approaching historical highs not seen since 2003.

The Nasdaq Composite Index rose about 1.3% that day, leading the three major indices. The semiconductor sector was the biggest driver------the Philadelphia Semiconductor Index saw a single-day increase of 4.6%, and the VanEck Semiconductor ETF rose about 4.5%. Micron Technology surged over 10%, Intel rose about 8.6%, SanDisk increased about 14%, Cerebras Systems jumped about 18%, and Cipher Mining rose over 11%.

This rebound occurred after three consecutive trading days of decline and also followed a cumulative drop of 33% in momentum stocks.

Why did this rebound happen? Short sellers were "squeezed"

To understand this rebound, one must first grasp how deep the previous declines were.

Goldman Sachs data shows that high beta momentum stocks fell a cumulative 33% in just a few trading days, one of the most severe pullbacks since the internet bubble burst. The high beta momentum index briefly fell below the 200-day moving average, hitting its lowest point since January of this year, with the level of overselling being the most severe since August of last year.

The deeper the decline, the greater the rebound potential------this is basic market logic.

This rebound was largely a "short squeeze" scenario. Many investors who shorted momentum stocks, especially trend-following traders from South Korea and Japan, suffered heavy losses over the past two weeks------the South Korean market even experienced large-scale margin call events, severely impacting local retail investors. When these short sellers were forced to cover their positions, buying pressure created a self-reinforcing upward spiral.

Zacks Investment Research analysts pointed out that Micron Technology had previously broken below the "head and shoulders" neckline on the daily chart, indicating a bearish technical pattern. However, on Tuesday, the stock price surged over 10%, reclaiming the neckline. "False breakouts often trigger violent reversals, as late-to-the-game shorts and short sellers get trapped."

Market breadth remains weak, the quality of the rebound is questionable

The rebound numbers look impressive, but the internal structure is not healthy.

BTIG strategist Jonathan Krinsky analyzed that overall trading volume on Tuesday was low, with SPY, QQQ, and S&P 500 spot trading volumes all 20% to 30% below the 20-day average. Meanwhile, the S&P 500 index rose nearly 1% that day, but the number of declining stocks still outnumbered advancing stocks------this year has seen the most instances of price divergence from market breadth, and this phenomenon reappeared on Tuesday.

Goldman Sachs trader data shows that overall exchange trading volume was about 17% lower than the 20-day average, with market maker liquidity at only $6.83 million, and market activity rated only 3 out of 10.

In other words, this rebound looks more like a concentrated explosion of a few heavily weighted stocks rather than a broad recovery.

Bloomberg macro strategist Michael Ball analyzed, "It is still too early to declare the adjustment over." Demand for put options on semiconductor ETFs and previous AI star stocks remains high, and the negative gamma exposure of the Nasdaq, semiconductor ETFs, and related stocks means market makers will chase prices rather than stabilize volatility------this amplifies both upward and downward movements.

BTIG warns: The rebound has hit key resistance, suggesting profit-taking at highs

Not everyone is optimistic about this rebound.

BTIG's Jonathan Krinsky explicitly warned, suggesting "profit-taking at highs (fade)." He previously predicted that the momentum stock rebound would encounter strong resistance in the 730 to 750 range, and Tuesday's rebound just pushed GSCBHMOM to the lower edge of that resistance zone.

Krinsky stated: "Extreme volatility, combined with historic stock differentiation, signals that the market is undergoing a comprehensive correction." He expects high beta momentum stocks to stagnate after entering the core of the resistance zone from Wednesday to Thursday.

Historically, since 1999, the high beta momentum long index has only seen single-day gains exceeding 7% above the 200-day moving average on 10 occasions. Three of these occurred this year, three in early 2021, and three in early 2000. Krinsky pointed out that this data "indicates both the rarity of this market and the ongoing statistical characteristics reminiscent of the 1999 to 2000 period."

Goldman Sachs, UBS: Momentum sell-off nearing its end, suggest gradual accumulation

In contrast to BTIG's cautious stance, both Goldman Sachs and UBS believe the momentum sell-off is nearing its end and suggest investors seize the opportunity.

Goldman Sachs' Julia Mensch noted in a report that Goldman had indicated last week that the momentum sell-off was "in its later stages." She wrote: "As positions have been significantly cleared (Goldman’s prime brokerage data shows that momentum exposure is at the 64th percentile of the past year and the 93rd percentile of the past five years), and there are no new fundamental catalysts behind this sell-off, we believe momentum has room to revert to long-term trends, and this sell-off may present a good opportunity to increase momentum exposure or buy AI stocks on dips."

UBS hedge fund equity derivatives sales head Michael Romano expressed similar views in a client report, believing that improvements in AI fundamentals signal a buying opportunity. However, he also advised investors to "build positions gradually rather than going all-in at once."

Romano wrote: "De-risking momentum is still a compelling judgment. Gradual accumulation is a prudent move." He expects the momentum sell-off to bottom out by the end of July (if it hasn't already) and stated: "Once the market turns, I expect liquidity to push prices to overshoot upward."

However, Goldman Sachs also maintains a cautious stance------given the recent high volatility and the upcoming earnings season, Goldman suggests that investors gain exposure through "limited-loss structures" rather than holding long positions directly.

Earnings season is the next key variable

The sustainability of this rebound largely depends on this week's earnings reports.

According to Reuters, a total of 113 S&P 500 constituent companies (accounting for about 18% of the S&P 500 market cap) will report earnings this week. Among them, Alphabet (GOOGL)'s earnings report is seen as "the most important data point of the week," with the market focusing on its full-year capital expenditure guidance for 2026------which is widely expected to be raised, providing important clues for the direction of AI spending.

LPL Financial's chief technical strategist Adam Turnquist stated: "The focus now is not just on the total capital expenditure, but the next focus will be on return on investment and the quality of spending, which we believe will become a core issue in the second half of the year."

He also pointed out: "We expect the semiconductor sector to continue to experience volatility as the overbought condition needs to be digested, profit-taking pressure will emerge, and crowded positions need to be cleared. From a fundamental perspective, we believe there are no substantial changes."

According to Reuters, so far, 66 S&P 500 companies have reported earnings, with about 88% of them exceeding analyst expectations. 3M (MMM) rose over 9% in a single day, and General Motors (GM) rose about 5%, both due to better-than-expected performance.

Bonds and macro: Another hidden danger

While the stock market is celebrating, the bond market is sending warnings.

On that day, U.S. Treasury yields rose across the board, with the short-end 2-year yield increasing by 5 basis points, and the 30-year yield rising by 2 basis points, with long-end yields reaching a two-month high, erasing the bond gains from last week's lower-than-expected inflation data.

Oil prices are one of the drivers. Brent crude futures closed back above $90 per barrel for the first time since June 11. The situation in the Middle East continues to escalate------the Houthi forces in Yemen announced a blockade of the southern entrance to the Red Sea, and two tankers carrying Saudi oil turned back in the Red Sea. Kpler's MarineTraffic data shows that even before the blockade was announced, cargo loading through the Bab el-Mandeb Strait had already decreased by 34% over the past two weeks.

RBC Capital Markets interest rate strategist Izaac Brook stated: "Today's market movement is primarily the result of rising energy prices. The volatility in interest rates has been amplified due to breaking through key technical levels------the 2-year yield at 4.20% and the 10-year yield at 4.60%------and the typical low liquidity trading environment of summer."

Bloomberg's Cameron Crise warned that long-term bond yields are at a critical point of turning 5% from a resistance level to a support level, with the next obvious target being 5.5%------"this will impact the stock market, especially when economic growth exceeds expectations, pushing yields higher and negatively affecting stocks."

Goldman Sachs IG credit head Kevin Boova also warned that the credit spreads of mega-cap tech companies have reached new highs, "the mega-cap cloud computing/AI/data center sector feels somewhat fragile again."