Popular Momentum Trades Like Palantir and AppLovin Are Unraveling: A Cautious Outlook

The recent decline in popular momentum stocks, such as Palantir Technologies Inc. (PLTR) and AppLovin Corp. (APP), serves as a stark reminder that the market can shift dramatically in a short period. Investors must brace themselves as these stocks continue to slide, with no immediate signs of recovery in sight.

The Current State of Momentum Stocks

On February 26, 2025, Joseph Adinolfi from Dow Jones reported that the iShares MSCI USA Momentum Factor ETF (MTUM) has experienced a significant downturn, erasing approximately half its gains from earlier this year. With less than a 5% increase as of the close on Tuesday, the ETF—one of the largest tracking the momentum factor—reflects broader challenges facing the retail trading community. This serves as clear evidence that even the most popular stocks can suffer devastating losses.

The Warning Signals

With rising caution in the markets, financial analysts like Farzin Azarm from Mizuho Securities USA are sounding the alarm bells. He warned that “the day is coming where you’re going to get a proper selloff, and it’s going to take a lot of people with it.” Azarm’s assertion is an important one, as it comes during a period when an increasing number of retail traders have begun utilizing margin accounts and leveraged products to enhance returns. Such trading practices can amplify losses and lead to further exposure if one deal goes south.

The Causes of the Unraveling

What specifically contributed to the tumultuous performance of popular stocks? According to Danny Kirsch, head of options trading at Piper Sandler, the setbacks facing prominent firms are influenced by various microeconomic factors rather than a single overarching issue. For instance:

• Palantir: Suffered from news suggesting significant cuts to the Pentagon’s budget by the Trump administration, dampening investor enthusiasm.
• AppLovin: Fell after a short report from the Bear Cave raised concerns about the company’s financial assumptions.
• Hims & Hers Health: Experienced a setback after an executive revealed that the company would need to pivot away from its popular GLP-1 drugs, as the FDA removed semaglutide from its shortage list.

Broader Trend in Momentum Stocks

Other momentum stocks have not been spared either, with companies like MicroStrategy Inc. (MSTR) seeing declines over 11% in one day. Some analysts suggest their prices are now heavily correlated with the fluctuating value of Bitcoin (BTCUSD) and generally lack the fundamentals to sustain high valuations. Even Meta Platforms Inc. (META), which enjoyed a phenomenal 20-day winning streak, has given up nearly half its advance amid market corrections.

A Cautious Approach

As these momentum stocks tumble, it’s vital that conservative investors exercise caution. While some analysts, such as Tom Lee from Fundstrat, assert that the current selloff represents “just a flesh wound,” history warns us against becoming overly complacent. The market is often characterized by volatility, and today’s key players can quickly evaporate tomorrow.

Implications for Conservative Investors

For traditional investors who value sound financial principles, the message is clear: avoid getting swept up in speculative trading that relies on rapid price appreciation. Instead, focus on businesses with solid fundamentals and resilient balance sheets. The road ahead may prove bumpy, but those who prioritize prudence and long-term planning over quick gains will be better equipped to navigate the choppy waters ahead.

Conclusion

The unraveling of momentum stocks including Palantir and AppLovin is a poignant reminder of the market’s intrinsic volatility. As investors wrestle with mixed signals and heightened uncertainty, it’s critical to analyze both the economic indicators and the inherent risks in their portfolios. Staying grounded in conservative financial principles will be paramount in weathering the storm that looms on the horizon.