The stocks that have dominated the market for years are getting destroyed. Here's what it means, and what might be next.

The stocks that have dominated the market for years are getting destroyed. Here's what it means, and what might be next.

  • The biggest winners on the stock market have suffered through a brutal two-week stretch as investors started instead buying the companies that have done the worst this year.
  • According to Ben Snider of Goldman Sachs, it's been the most dramatic shift since 2009, and one of the worst stretches for market leaders since 1980.
  • Baird investment strategist Willie Delwiche said stocks are unusually vulnerable to bad news while this shift is going on, but if it lasts, it could help the bull market endure for even longer.
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In the stock market this month, up is down and down is up.

It's been two weeks of pain for the stocks that had done the best this year, like the big tech companies that have led throughout the bull market. The overall group - known as momentum stocks - also includes and defensive companies, which have been rallying for much 2019.

That weakness was paired with a surge in the so-called value stocks that had done the worst, like banks and energy companies.

"Almost everything that was lagging has now rallied and almost everything that was doing well has been hurt," Baird strategist Willie Delwiche said in an interview with Business Insider.


According to Goldman Sachs equity strategist Ben Snider, it translated to the worst two weeks for momentum stocks - defined as the best-performing 20% of the S&P 500 over the trailing 12 months - since 2009. In fact it was one of the worst two-week stretches for those stocks since 1980, with returns in the first percentile for that period.

Read more: The stock market is experiencing a jarring shift seen only twice in history, and not since the tech bubble. Here's where JPMorgan's quant guru says investors should look to capitalize.

It's been brutal for investors who made big bets that those recent winners would keep climbing. In a note to clients, Snider explained the chain of events this way:

"Perceived improvement in US-China trade negotiations and better-than-feared economic data helped ease investor concern about an impending recession, lifting bond yields and sparking the market rotation," he wrote.

The rise in bond yields caused investors to dump the defensive stocks, which pay high dividends. The stocks had become expensive and those dividend payments didn't look so attractive as bond yields increased.


Meanwhile the more optimistic view of economic growth that Snider mentions set off big rallies in shares of companies that are more closely tied to the economic cycle, like energy, banks, and small caps.

Those stocks were extremely undervalued compared to 2019's leaders.

Delwiche said that if the shift into neglected stocks lasts a bit longer, it could be a very good thing, leading to broader market leadership that helps the decade-old bull market keep running.

But the shift may not last, he said. If it doesn't, then the market's recent leaders will have lost strength while suitable replacements fail to show up.

"We're in a vulnerable position right now," he said, meaning an increase in trade tensions or bad economic data could damage investors' confidence more than usual.


Read more: GOLDMAN SACHS: The stampede out of stock-market favorites is a preview of more extreme moves to come. Here's how to single out the ultimate winners.

What's clearer, according to Snider, is that a comeback for momentum is unlikely. He wrote that momentum trades work best when conditions are consistent, and based on the radical change in positioning, investors seem to think conditions are changing.

The stocks that have momentum also naturally change, he added. That means if these conditions do last long enough, a different group of stocks will gain momentum, and the could become consistent winners. But that doesn't mean they will become as successful as tech and defensive stocks have been in recent months.

In other words, whatever emerges over that time is likely to look different from what's come before.

For those wishing to dabble in either momentum or value stocks, here are two corresponding exchange-traded funds:

  • iShares Edge MSCI USA Momentum Factor ETF (MTUM)
  • iShares Edge MSCI USA Value Weighted ETF (VLUE)