US stocks rally 3.6% in August crash-up after July momentum unwind

The S&P 500 climbed 3.6 percent in the first week of August, its best weekly gain since April, after a July momentum unwind reversed into a sharp rally that caught many investors flat-footed.

Michael Burry, the investor who bet against subprime mortgages in 2008, warned the surge could resemble the 1987 crash, saying in a Substack post that the rally may not be sustainable. He holds short positions including in the iShares Semiconductor ETF.

The Dow rose 3 percent and the Nasdaq Composite jumped 5.2 percent in the first week of August, with all three major indexes posting their best weekly performances since April. The S&P 500 added 1.9 percent on Aug. 5 to reach its first record high since June, driven by stronger-than-expected corporate earnings and favorable shipping conditions in the Strait of Hormuz. The Dow and S&P 500 now hover near all-time highs.

The reversal has split opinion on whether the rally has legs. Burry's short position in the iShares Semiconductor ETF reflects his skepticism about the AI boom, and GuruFocus data values the fund at $338.85 against a market price of $542.21, a 60 percent premium. The fund's trailing price-to-earnings ratio stands at 26.2 times, with a forward multiple projected at 35.71 times.

The crash-up has been unusually violent by historical standards. Trading volume on SpaceX, which listed about two months ago, topped 255 million shares on Aug. 6, the highest since mid-June, as its first lockup expired and 911.5 million insider shares became available for sale. The stock did not collapse, a sign that buyers absorbed the supply.

The rally has been led by momentum and technology names. The Nasdaq's 5.2 percent advance outpaced the Dow's 3 percent gain, and a screen of stocks trading near 52-week highs surfaced names including OptimumBank Holdings, EuroDry, Enova International, Anika Therapeutics and The GEO Group, all of which rose more than 30 percent in four weeks, according to Zacks Investment Research.

Favorable shipping conditions in the Strait of Hormuz, a key oil transit chokepoint, helped underpin the move, easing concerns that had weighed on energy and transport names during the July unwind. The S&P 500's record close on Aug. 5 came as corporate earnings beat expectations, giving investors a fundamental reason to re-enter after the shakeout.

The question now is whether the crash-up marks a durable bottom or a bear-market rally. Burry's warning echoes the 1987 pattern, when the S&P 500 fell more than 20 percent in a single day after a long run-up. With the Dow and S&P 500 back near record highs, positioning is again stretched, and traders will watch whether breadth holds in coming sessions.

This article is for informational purposes only and does not constitute investment advice.