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Introduction

Just when you thought it was safe to go back in the water, the momentum factor is taking another beatdown.

July was already a historic washout, with the GS Momentum Basket falling roughly 45% from peak to trough. Now, over just the past two sessions, momentum has suffered another ~14% drawdown.

While the speed and magnitude of the move are jarring, they are not entirely unusual. Momentum has experienced several similarly violent drawdowns over the past two years, as crowded positioning can unwind rapidly once leadership begins to reverse.

The question now is whether this is simply another painful reset within the prevailing trend—or the beginning of something more consequential.

What does this mean? It’s still too early to say. Many will interpret the increasingly wide and loose price action as part of a broader topping process, and there is enough technical validity to that argument that it shouldn’t be dismissed.

Recall that we also highlighted the weekly DeMark Sequential 13 sell in last week’s report as a developing risk for the Semiconductor group (SMH). Our initial expectation was that this signal would become more consequential in late August/September, but the market appears to have front-run that risk, with the latest momentum unwind arriving sooner than anticipated.

And unfortunately, we are now staring at what appears to be a failed reclaim of the 50-day moving average, followed by Wednesday’s gap lower (white). That is not constructive and warrants increased caution until the gap can be reclaimed.

SMH is now backtesting the prior red gap window at 548–562, an area that originally increased our confidence in a durable bottom. That thesis is now being tested. A failure to hold this zone would represent another technical breakdown and likely open the door to a retest of the recent lows.

Before getting too bearish on Semis, it’s important to zoom out to the higher timeframes. The broader structure still resembles a Wave 4 pullback into the 50% retracement, which is now developing into a larger bull flag.

If this interpretation is correct, the next phase would be a Wave 5 advance—and Wave 5s are notoriously choppy and volatile, consistent with the price action we are currently seeing. That does not preclude another retest, or even a marginal lower low versus July, but for now the larger bullish structure remains intact.

While we would prefer a shallower corrective process, with the red gap window above holding as support, that outcome could set the stage for a potential inverse head-and-shoulders pattern.

Regardless of the exact path, we suspect the next month or so will remain a tough slog for Semis, characterized by elevated volatility and choppy price action rather than a clean directional trend.

So why the sudden change in opinion? Because we follow price first. When a group rejects a key technical threshold as decisively as SMH just did, we have to respect the message. Fighting a repricing of risk simply because the fundamental narrative remains compelling is not what we do.

Can we construct a narrative around why Semis abruptly rolled over? Yes. We see two likely catalysts:

We are not convinced this represents a meaningful deterioration in underlying AI demand. But in the short run, price doesn’t need the narrative to be right—it only needs enough investors to react to it.

The market cares when the market cares—and on Tuesday, the 30-year Treasury yield surged to its highest level since 2007.

At some point, higher discount rates become difficult for long-duration growth assets to ignore. This week, that threshold may finally have been crossed.

That said, the Treasury stepped in today, announcing plans to double the size of its longer-duration bond buybacks in an effort to improve liquidity and alleviate pressure on the long end of the curve. The market responded immediately, with the 30-year yield reversing sharply from its 2007 highs.

While this does not eliminate the structural concerns surrounding long-term rates, it does introduce a powerful counterweight to the recent bond selloff. If yields continue to retreat, it could remove one of the primary pressure points behind this week’s Technology and momentum-factor weakness.

Interesting timing. In our 8/16 report, we highlighted the newly completed DeMark Sequential 13 sell as a reason to remain hopeful that long-term yields could reverse, despite a technical structure that continued to argue higher.

Then on Tuesday, the 30-year yield printed a new DeMark Combo 13 sell, aligning with last week’s Sequential 13.

And whammo.

One day later, the Treasury announced an expansion of its long-duration bond buyback program, helping catalyze a sharp reversal lower in yields.

Did DeMark predict the Treasury’s move? Of course not. But this is exactly why we repeatedly say that DeMark signals can be weirdly predictive. They often identify exhaustion and potential inflection points before the catalyst responsible for the reversal becomes obvious.

Or, as Morpheus might say:

“Do you believe now, Neo?”

We will have to see where this ultimately leads. There are a lot of new moving parts to digest, and they are arriving directly inside the volatility window we highlighted around OPEX and VIX expiration.

Recall that we concluded Sunday’s report by warning readers to brace for near-term turbulence. Well, the turbulence has arrived.

The more important question is whether this changes our broader bullish thesis—or whether the current weakness is simply the buyable pullback we said should be expected within the prevailing uptrend.

There’s only one way to answer that.

Let’s check the charts.