In today’s market, momentum unwinds are reaching extreme levels, causing significant pain for investors. According to UBS Torsten Sippel, the unwind is driven by both actives and quants, resulting in a more defensive positioning among active investors. Retail investors are also contributing to the selling pressure, with buybacks at a seasonal low. This perfect storm has led to extreme dispersion across sectors, with cyclicals such as regional banks, telcos, and staples seeing a bid.

Sectors like software are finding some support, but the unwind is more of a rotation than a simple shift in sector allocation. The money is flowing into areas that have historically performed well during times of market stress, such as value stocks and cyclicals. The UBPTMOMO index has seen an 8% decline in momentum, while the UBPTVALU index has rallied by 8%. The UBXXSPEC index has lost 9%, and the UBXXSEMA index has dropped 7%. The value vs growth differential has widened to +6%.

While the overall market sentiment is negative, there are pockets of strength emerging. Technology stocks, for instance, are underperforming and may be worth buying on weakness. Banks and telcos are also seeing a bid, with net buying activity across these sectors. Retail investors have turned sellers, but this trend may level off as the day progresses.

The upcoming earnings report from Alphabet later today will be closely watched, as it has the potential to set the tone for the Mag7 and AI winners trade. While expectations are high for a strong quarter, the company is not guiding revenues, and capex numbers will be important to watch.