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Introduction

July was supposed to be fun—the unofficial start of summer. Warmer weather, beach trips, vacations, barbeques, and a chance to slow down and unwind. Unfortunately, the stock market never got the memo. Instead, it threw a tantrum in the most crowded corners of the market, wreaking havoc on portfolios overweight beta and frustrating investors trying to navigate an increasingly fluid and unforgiving backdrop.

That outcome was particularly surprising given July's historical tendency to favor risk assets. Seasonally, it has been one of the strongest months of the year, especially for growth stocks.

Over the past 20 years, the Nasdaq-100 (QQQ) has typically delivered its strongest monthly performance in July, outperforming nearly every other month on the calendar. This year, however, the market completely ignored the historical playbook.

Most of the damage can be traced to the semiconductor sector and AI infrastructure names. In less than a month, the market's undisputed leaders went from hero to zero at breathtaking speed, pushing the semiconductor complex into its own bear market and inflicting significant damage on momentum-heavy portfolios.

What made the selloff even more perplexing was that, on many of the semiconductor sector's worst days, the vast majority of stocks were actually advancing. We have discussed this divergence in prior reports, and it is best illustrated by the equal-weight S&P 500 (SPW Index), which went on to record a new all-time high just last week.

Defensive and cyclical sectors picked up the baton, with Energy, Financials, and Healthcare leading the advance—three groups we have consistently highlighted as attractive sources of alpha.

This bifurcation in performance appears to have been driven more by positioning than by any meaningful deterioration in fundamentals. The Kospi Index, which has become heavily levered to the AI infrastructure trade, declined roughly 44% in less than six weeks—an astonishing drawdown for a major equity index over such a short period.

Friday finally brought a measure of stabilization as the index found support at its 200-day moving average. While it is far too early to declare a durable bottom, this was precisely the area where bulls needed to defend, and for now, they did.

From a purely technical perspective, the degradation appears to have largely run its course. The combination of a massive weekly hammer reversal and support within the 50%–61.8% Fibonacci retracement zone is characteristic of an exhaustive decline and suggests downside momentum is fading.

Volatility in the Kospi reached unprecedented levels, with trading halted four separate times during July.

The Kospi is an index characterized by elevated leverage and speculative positioning, making periodic unwinds a necessary mechanism for clearing excesses. The U.S. experienced its own version of that dynamic this week with reports that the Situational Awareness fund was forced into liquidation. According to reports, the fund employed as much as 4x leverage in high-beta equities while failing to adequately hedge its portfolio, ultimately leading to a stunning collapse and a reported rescue by Citadel through purchases at distressed prices.

These types of forced liquidations and public portfolio unwinds often coincide with important inflection points, as margin-call selling exhausts itself and forced sellers are removed from the market. While it is impossible to know every catalyst driving price action beneath the surface, the evidence suggests the conditions for stabilization are beginning to emerge.

While we had no knowledge of the Situational Awareness debacle, our analysis reached the same conclusion several days earlier. In our July 29 report, we argued that conditions were becoming increasingly favorable for a reversal in growth stocks.

We wrote:

We didn't need to know why a reversal would occur—only that the probabilities were increasingly pointing in that direction. Markets often reverse before the narrative becomes obvious. More often than not, price creates the narrative, not the other way around. Now that the forced-selling story has emerged, it provides a plausible explanation for the move and could help support a continuation of the rebound.

That said, we are not prepared to declare that the pain trade is definitively over. Macro crosscurrents remain significant, with Iran continuing to represent the largest source of uncertainty. Elevated oil prices are placing renewed upward pressure on Treasury yields, and as we illustrated in our last report, both are approaching levels that become increasingly problematic for equities.

Weekend headlines suggesting progress toward a potential Iran agreement could lend support to the stabilization thesis, but placing too much confidence in geopolitical headlines has repeatedly proven to be a fool's errand.

Instead, we prefer to let the charts guide us.

Let's take a look.